Limited Company Formation
Discussion
Having recently had a limited company setup, I've just been reading through the documentation and one statement confused me. In the articles of association, it mentions that 1000 shares were issued at a cost of £1 each and I as a director have all of those shares. At the risk of sounding completely stupid, what does that mean exactly?
thanks,
Darren
.
thanks,
Darren
.
The ownership of a company is determined by the number of Shares issued and who owns those shares. In this case, the company has decided that the ownership of the company will be represented by 1,000 shares (it can be any number actually - it just depends on what was decided at the time the company was set up - you will see the details of shares etc outlined in the company's Memorandum and Articles of Association).
Which individual shareholder has "control" of the company is determined by the numbers of shares "bought" by each individual. As you seem to have acquired all 1,000 shares, you have 100% control of the company.
Please note that there is a legal distinction between "Shareholders" and "Directors". The Shareholders "own" the company and the Directors "manage" the company. They need not be the same people (as is the normal situation in big PLCs) but very often they are (as is the normal situation in small, owner managed companies - like yours).
Shareholders are entitled to shares of the annual profits - called dividends. Directors are usually paid by means of Salaries. Obviously if you are both a shareholder AND a director, there is scope to pay yourself by either, or both, methods.
However, there are quite dramatic differences in the tax and National Insurance treatment of dividends compared to salaries so professional advice should always be sought before deciding which route to take.
Please note that, in theory anyway, having received 1,000 shares valued at £1 each, you would expect that the shareholder (i.e you) should have deposited £1,000 of your own money into the company bank account. It's amazing how often this basic point is missed. If you have not paid this money in, you are in debt to your own company which is technically illegal under the Companies Act and the company may suffer a penal tax charge (under Section 419 of the Taxes Act) until the siuation is redressed.
Once you start running your limited company, you should always be mindful of the tax and NI implications of any money drawn from the company for you personally. You can be guaranteed that there will be some tax implication arising of any such transaction. This relates to all cash drawn from the bank account and also any situations where the company bank account is used to pay personal bills. So, tread carefully.
Which individual shareholder has "control" of the company is determined by the numbers of shares "bought" by each individual. As you seem to have acquired all 1,000 shares, you have 100% control of the company.
Please note that there is a legal distinction between "Shareholders" and "Directors". The Shareholders "own" the company and the Directors "manage" the company. They need not be the same people (as is the normal situation in big PLCs) but very often they are (as is the normal situation in small, owner managed companies - like yours).
Shareholders are entitled to shares of the annual profits - called dividends. Directors are usually paid by means of Salaries. Obviously if you are both a shareholder AND a director, there is scope to pay yourself by either, or both, methods.
However, there are quite dramatic differences in the tax and National Insurance treatment of dividends compared to salaries so professional advice should always be sought before deciding which route to take.
Please note that, in theory anyway, having received 1,000 shares valued at £1 each, you would expect that the shareholder (i.e you) should have deposited £1,000 of your own money into the company bank account. It's amazing how often this basic point is missed. If you have not paid this money in, you are in debt to your own company which is technically illegal under the Companies Act and the company may suffer a penal tax charge (under Section 419 of the Taxes Act) until the siuation is redressed.
Once you start running your limited company, you should always be mindful of the tax and NI implications of any money drawn from the company for you personally. You can be guaranteed that there will be some tax implication arising of any such transaction. This relates to all cash drawn from the bank account and also any situations where the company bank account is used to pay personal bills. So, tread carefully.
Thanks for the detailed response Eric. I have looked into the Tax and NI implications, though I was somewhat confused over the shares issued (as you say, surely 1000 shares at £1 would mean an investment of £1000). I'm not particularly impressed with that, given that I need to invest in a lot of things personally to get the company off the ground (car etc which I've been advised not to buy through the company).
So, two additional questions:
1) I have approximately 3k worth of computer equipment which will be used to run the business (host a web site, run email etc). Can the company buy that from me (for say, £1000)? I must add that that is a legitimate requirement rather than a desire to 'fiddle the books'.
2) How do I pay the company for the shares?
3) The company was setup yesterday. How long do I have to address the situation of me being in debt to the company? I could not open a company bank account until I had the documentation from the company formation, so I can't really see how I could have avoided getting into this situation from day 1!
thanks,
Darren.
edited to add: I've just been informed that "Strictly speaking you are not required to pay in full for the shares you issue on incorporation" by the company who registered the company. This is getting very much above my head, so I think it's time to consult the accountants/tax consultants
>> Edited by _DJ_ on Thursday 13th May 11:02
So, two additional questions:
1) I have approximately 3k worth of computer equipment which will be used to run the business (host a web site, run email etc). Can the company buy that from me (for say, £1000)? I must add that that is a legitimate requirement rather than a desire to 'fiddle the books'.
2) How do I pay the company for the shares?
3) The company was setup yesterday. How long do I have to address the situation of me being in debt to the company? I could not open a company bank account until I had the documentation from the company formation, so I can't really see how I could have avoided getting into this situation from day 1!
thanks,
Darren.
edited to add: I've just been informed that "Strictly speaking you are not required to pay in full for the shares you issue on incorporation" by the company who registered the company. This is getting very much above my head, so I think it's time to consult the accountants/tax consultants
>> Edited by _DJ_ on Thursday 13th May 11:02
By offsetting the value of the computer equipment which you currently own personally, you could, in effect, clear the £1,000 amount you owe the company in respect of the shares. In fact, if these are the only transactions on your "Directors Current Account" for the whole year, the company would end up owing YOU £2,000 (i.e £3,000 owed TO you in respect of the computer gear less the £1,000 owed BY you in respect of the shares).
If you transfer the computer equipment previously owned by you into the company, there is no need. initially anyway, to pay any cash from the company to you for the equipment.
The reason you have been advised not to put your personal car into the company is that you would then be liable to additional PAYE and National Insurance under the benefit in kind regulations relating to company cars.
If you transfer the computer equipment previously owned by you into the company, there is no need. initially anyway, to pay any cash from the company to you for the equipment.
The reason you have been advised not to put your personal car into the company is that you would then be liable to additional PAYE and National Insurance under the benefit in kind regulations relating to company cars.
eric mc said:
The reason you have been advised not to put your personal car into the company is that you would then be liable to additional PAYE and National Insurance under the benefit in kind regulations relating to company cars.
Eric is right (as you would expect him to be, given his profession
) I don't run any of my cars as company cars. It is more beneficial to charge my company for any business miles I do. The going rate is 40p* per mile for the 1st 10,000 miles and 25p* per mile thereafter, if I remember correctly.
Don't forget to insure your car for Class 1 Business Use though.
(* for vehicles over 2000cc in capacity, that is. But both of mine are.)
>> Edited by JonRB on Thursday 13th May 11:29
With regards to your shares, you do not need to pay them up in full immediately. Only plc's need to have 25% paid immediately in cash, which means the minimum cash in bank for a plc at start would be £12,500 before they can certified for trading.
If you wish to pay with anything other than cash, you need to declare that on form 88 together with a contract describing the transaction, although you can substitute that with a form 88(3), and make sure that you will have paid any stamp duty that may be due on it.
There are other things you can use as payment for the shares, I'm not even sure they need necessarily to be tangible (someone else can clarify that one though, but I'm pretty sure they dont have to be!). You should really consult an accountant as there may be tax advantages in planning properly.
Good luck with the business though.
If you wish to pay with anything other than cash, you need to declare that on form 88 together with a contract describing the transaction, although you can substitute that with a form 88(3), and make sure that you will have paid any stamp duty that may be due on it.
There are other things you can use as payment for the shares, I'm not even sure they need necessarily to be tangible (someone else can clarify that one though, but I'm pretty sure they dont have to be!). You should really consult an accountant as there may be tax advantages in planning properly.
Good luck with the business though.
The point as Nija Eli sys is that the consideration paid for the shares (whether cash or in kind) has to be returned on the form 88(b) to the Stamps Branch of the Inland Revenue and the appropriate Stamp Duty paid.
In my experience, these forms usually are submitted stating that the shares were paid for by cash and the duty paid but the "cash" never turns up in the company bank account.
In my experience, these forms usually are submitted stating that the shares were paid for by cash and the duty paid but the "cash" never turns up in the company bank account.
JonRB said:
When my company was formed it was 100 shares at £1 each and I opened the company bank account with a personal cheque for £100.
Why was your company formed with 1000 shares at £1 each?
Yes, and there lies the cock up! I've just spoken with my accountant and he suggested 100 shares (@£1) would have been a better way to do it. Ah well, you live and learn. It serves me right for attempting to form a company cheaply online (even though I'm sure I didn't specify that I was to be assigned 1000 shares).
The plan now is to complete the form, pay £1000 into the company bank account from my account and have the company buy the computer goods at their market value, which is probably around 2k. I'll then take the remaining 1k out of the company when it's in a position to be able to fund it and maintain decent cash flow; I've already completed jobs for 2 customers so that shouldn't be too long.
I'm also considering changing the share holding (so that the company secretary has 20% of the shares I currently hold). I'm sure that will be yet another nightmare!
But, I suppose I've learned not to rush into things and consultant the accountant at every turn...
Darren.
JonRB said:
(* for vehicles over 2000cc in capacity, that is. But both of mine are.)
I didn't realise they still considered the size of the car/engine when calculating the amount claimable per mile? I know they did a few years ago (and 2000+ was the highest bracket), do they still?
Darren
eric mc said:
The point as Nija Eli sys is that the consideration paid for the shares (whether cash or in kind) has to be returned on the form 88(b) to the Stamps Branch of the Inland Revenue and the appropriate Stamp Duty paid.
In my experience, these forms usually are submitted stating that the shares were paid for by cash and the duty paid but the "cash" never turns up in the company bank account.
Its got me thinking now...
Eric, can you elaborate as to whether you can actually "pay" with intangibles? And assuming you are close company, whats to stop someone settling share price with something like "goodwill"??? Both shareholder and director would agree?
I guess the debit side of the transaction would still show it is an intangible? So could you then in theory have a company with £1M nominal worth share capital paid with goodwill and brand worth
? I've seen some software being used by some people I know that only report a turnover and net worth figure, obtained from companies house reports. The problem is they use it as a guide to how much credit to give... doesnt sound like such a good idea if the above is possible? BTW, to clarify, issued shares if paid in cash are not subject to stamp duty. A transfer of shares is.
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