Legal advice for newbie

[Gomez]

Hi. Still in Permie role at the moment but trying to set up a contracting opportunity. This is my situation......
I have been approached by a guy (lets call him Mr X) who does similar work to me with his own business (he is a one man Ltd). He is trying to expand his business and wants to use a number (around 6) associates to get more work. I know Mr X well and also 2 of the other potential associates. I also trust Mr X. Mr X has said that he is not interested in making extra money out of his associates but rather increase the profile of his business and win bigger contracts. Mr X's accountant has suggested a possible legal structure for us to work to. This involves setting up another company, majority owned by Mr X's current company and then the associates potentially becoming directors and share holders of that company and taking their remuneration by combination of salary and dividends. I need someone to explain to me what the benefits/drawbacks of this would be in relation to just setting up myself as a Ltd company and invoicing Mr X's company for my work. Do I need to speak to a companies legal bod or will an accountant do? Any recommendation of legal ppl to speak to would be appreciated

Yours in anticipation.

[cojak]

Hi. Still in Permie role at the moment but trying to set up a contracting opportunity. This is my situation......
I have been approached by a guy (lets call him Mr X) who does similar work to me with his own business (he is a one man Ltd). He is trying to expand his business and wants to use a number (around 6) associates to get more work. I know Mr X well and also 2 of the other potential associates. I also trust Mr X. Mr X has said that he is not interested in making extra money out of his associates but rather increase the profile of his business and win bigger contracts. Mr X's accountant has suggested a possible legal structure for us to work to. This involves setting up another company, majority owned by Mr X's current company and then the associates potentially becoming directors and share holders of that company and taking their remuneration by combination of salary and dividends. I need someone to explain to me what the benefits/drawbacks of this would be in relation to just setting up myself as a Ltd company and invoicing Mr X's company for my work. Do I need to speak to a companies legal bod or will an accountant do? Any recommendation of legal ppl to speak to would be appreciated

Yours in anticipation.

Welcome to CUK Gomez.

Because your first post is so specific I'm moving it to the Legal sub-forum.

[TheCyclingProgrammer]

There's no general problem with setting up a company in this way, the problem I forsee is that your dividend remuneration depends on your shareholding which might not always reflect the amount of work an individual is doing for the company.

In short, the biggest drawback is that its complicated. Having his existing company sub-contract to you is simple - you invoice, HisCo pays.

Beyond that, I'd recommend you seek specialist advice as I'm not sure this is the sort of thing you want to do based on the advice of some random people on a contracting forum.

[Magpie252]

I'd recommend you seek specialist advice as I'm not sure this is the sort of thing you want to do based on the advice of some random people on a contracting forum.

This is the single most important piece of advice you will receive here. I’d suggest that the legal structure of the company is outside the scope of an accountant, see a specialist

I personally can’t see any advantage in joining a sub company rather than running your own Ltd

Ask yourself some basic questions:

Why does Mr X want to keep a stake in the company? Wouldn’t he take his cut when the payment come into his tier 1 company? Why should he be entitled as a shareholder to a second slice of the pie when the sub co issues dividends?

What happens when you work 10 months in a year, but one of your colleagues only works for 3? Is he entitled to the same share of the dividend (based on his shareholding) whilst contributing less to the available pot. What happens when a new associate joins for the last 3 months of the year? Your percentage of the pot may fall to accommodate him

Mr X doesn’t have any work for you, so you jump on Jobserve and find yourself a nice juicy contract. Are you tied to work exclusively for Mr X? are you forced to put the contract through Mr X’s company? Do you have to share the profits from this opportunity with the rest of the associates?

I’d run my own Ltd & bill Mr X, it’s then clear what’s yours is yours, the harder you work – the more you directly benefit, anything else is likely to be a minefield

[northernladuk]

IMO walk away. So many of these start ups fail for whatever reason be it lack of work, differences of opinion or lack of trust.

You will need a good business head on to understand the work and see if you can quantify any returns he is suggesting and also how it will affect your revenue stream. You'll also have to be pretty savvy to make sure you are getting what you are due and adding to the business as well.

You can make more than enough just getting your own contract so wouldn't touch this with a barge pole.

And..

I also trust Mr X. Mr X has said that he is not interested in making extra money out of his associates but rather increase the profile of his business and win bigger contracts.

I'd also say don't kid yourself. He IS trying to make money out of you in the least risky way he can i.e take permies on at his cost.

Be interesting to see if anyone has any real life stories of how this type of thing went for them.

[Gomez]

Thanks all who have replied so quickly. A lot of my thoughts have been echoed in what you have said.

[TheFaQQer]

Sounds overly complicated to me, for very little (or no benefit).

For simplicity, let's say he has five associates. The proposed structure seems to be that his company owns 50% of the other company and then you'd all own 10%. So what happens if you do no work in the year - when there is the board meeting to determine the dividend level, you get the same as the others, and his company gets five times as much as you. And then he wants to take someone else on - so how do they get their shares?

I suppose he could own 100% of the subsidiary, and you then get 1 class B share, someone else gets 1 class C share etc. and dividends are then paid in proportion to that ownership and at different rates.

The problem I would have as someone doing the work, is that there is nothing that would guarantee you could get your money out - if the board decides not to pay a dividend, then you don't get a dividend.

Set up your own limited company, and contract to his company - your company has a contract, and invoices accordingly. You personally have the choice how you get your money out then.

[TheFaQQer]

Be interesting to see if anyone has any real life stories of how this type of thing went for them.

There are quite a few consultancies which work on the associate model - IIRC, Claremont and InnoApps within the Oracle space work on this model although Claremont are expanding more with permies. I think Mokum probably did the same thing before they were taken over by PWC last year.

I know people who have worked through consultancies on this model and had no problem with it (it makes the consultancy look bigger and better than they are, so they can bid for more lucrative work) - but they were "normal" contractors rather than having a convoluted ownership structure.

[Gomez]

(it makes the consultancy look bigger and better than they are, so they can bid for more lucrative work) - but they were "normal" contractors rather than having a convoluted ownership structure.

This is precisely why Mr X is doing this. Mr X, myself and one other have invested considerable effort in getting Mr X's company onto Government frameworks recently so that it can win bigger work and farm some of it out to the associates for pretty much the same day rates that we have on the frameworks.

[BlasterBates]

This is precisely why Mr X is doing this. Mr X, myself and one other have invested considerable effort in getting Mr X's company onto Government frameworks recently so that it can win bigger work and farm some of it out to the associates for pretty much the same day rates that we have on the frameworks.

This actually sounds very much like a good opportunity.

If the money is flowing to be honest it doesn't matter how you set up. If the idea is to farm out then it makes sense to do this through a company, and for you to be part of that company, simply because it sounds like it could grow and become a "real company".

Any dividends issued will be divided on a pro rata basis so you need to be sure you're happy with the proportion.

A lot of start ups fail, but this sounds in comparison to most to be on a very sound footing indeed, i.e. a huge backlog of work waiting to flood in.

Just be realistic about what you can earn and what the risks are.