Client giving equity, should myself or my company own it?

[nfoote]

So have been working for some time on-and-off for ClientCo for basically no coin on the understanding we'd eventually move to an equity deal, ie they're offering a % of the company. This is finally getting put down on paper soon. (yes yes I know it was risky working with nothing in writing, but that was my choice and is beside the point of this topic.)

Original agent has long since been paid out and is no longer of any concern.

So question is, is it best if MyCo owns this (for example) 10% share in ClientCo or should I own it directly?
Obviously I own 100% of MyCo, so I guess its a case of;
A) I own 100% of MyCo which in turn owns 10% of ClientCo
B) I own 100% of MyCo and 10% of ClientCo

Which would be best/easiest and I guess, most importantly as always, most tax efficient? Or is it not going to matter either way in the end?

ClientCo is a small online startup, so (apart from me as a developer!) has low overheads, thus most profit would become dividends. At the moment profit is basically nothing but obviously in time its hoped this would grow. Even at only a small % share its hope this would become a quite nice dividend potential. At some further point in time the whole thing may be sold, thus leaving bestowing a significant capital gain. The point is, while its basically worth nothing now, it could be worth something sometime and that's when tax efficiency would obviously be key.

Thoughts?

[ClearSky Accounting Dan]

Simple answer is....it depends! Factors to consider are:

- When you would sell the shares
- How much they're likely to be worth
- Will you be higher rate tax payer in year of disposal

From a dividend income point of view, you'll be better off holding the shares in your ltd co, as you'll be able to decide when to take the dividends from your ltd co. If you hold shares personally then you'll be subject to tax on those dividends when Clientco decides to pay a dividend.

From a capital gains point of view, if held personally then you have annual exemption (currently £10,600) so first £10,600 of gain is not subject to tax. Tax on gains over £10,600 are subject to tax at 18% (if basic rate taxpayer in year of disposal) or 28% (if higher rate taxpayer in year of disposal). If held by the company then the company pays corporation tax at 20% of the chargeable gain.

[northernladuk]

You shouldn't be thinking about what stake and who has it... you should be asking yourself is the company going to make any money? 10% of squat is still squat. Is this deal going to compensate you for the time or be a millstone around your neck. Very easy to get excited about an equity deal and forget to check whether it will actually be worth anything. Have you projected what your income will be over the next couple of years for it? Do you know what the companies strategy is, reinvest profit and not pay shares for a period etc

Surely the equity is in return for work the LTD is doing it. To take that personally would be akin to paying yourself directly for the work your LTD does?

[northernladuk]

Is this the same company you were talking about in June 2011??

http://forums.contractoruk.com/busin...nt-object.html

And they haven't paid you anything or agreed equity in the last 2 years?

[jmo21]

wonder if the OP will not bother replying to his thread like the last one

[nfoote]

Is this the same company you were talking about in June 2011??

http://forums.contractoruk.com/busin...nt-object.html

And they haven't paid you anything or agreed equity in the last 2 years?

As I said, its been on and off, sometimes in own time. However, that too is beside the point. The why of it isn't the question, just the how.

[nfoote]

wonder if the OP will not bother replying to his thread like the last one

I'm here. I did (and do) read it all, apologies for not replying last time.

[eek]

As I said, its been on and off, sometimes in own time. However, that too is beside the point. The why of it isn't the question, just the how.

The how should have been when you started nowadays your not exactly in a position of strength to negotiate.

However you can work out how much time you've invested in it and try to get equity based on the value of your time against the value of the time invested by the others involved.

[nfoote]

From a dividend income point of view, you'll be better off holding the shares in your ltd co, as you'll be able to decide when to take the dividends from your ltd co. If you hold shares personally then you'll be subject to tax on those dividends when Clientco decides to pay a dividend.

Ok well for the time being this seems to make the most sense, seems to be about control over the dividends. I would have though MyCo would have to pay tax on the dividends paid to it by ClientCo too tho?

[Nixon Williams]

Ok well for the time being this seems to make the most sense, seems to be about control over the dividends. I would have though MyCo would have to pay tax on the dividends paid to it by ClientCo too tho?

No, UK dividends paid to another UK company are not, in reality, taxed anymore.

They are classed as Franked Investment Income and so the tax is deemed to have been paid. It can have an impact on whether your company will be liable to the higher rate of corporation tax, but this is unlikely to be an issue.

Bear in mind that holding the shares via your company, could jeopardize any claim for entrepreneur's relief, if and when you close the company.

You would also need to consider the long term implications of holding the shares in your 'holding' company.

Alan