Reply to: Protecting the warchest

[MrMarkyMark]

dont misquote me - that's what all the unreadable paperwork is for (dont pay them until client pays you, etc)

I don't believe I did mis-quote you .

To be frank, you are being very Naive, yet again.

Who do you think would wait 3 months+ to be paid, sometimes more?
You need to factor it yourself, or get someone else to manage that risk for you, thats how it works.

[pr1]

Sounds simple doesn't it.....until the client does not pay you for 3 months+, very common when you go direct.
You have to have the reserves to manage the risk of paying all your guys for those 3 months and maybe not getting paid yourself.

dont misquote me - that's what all the unreadable paperwork is for (dont pay them until client pays you, etc)

[georgeg]

So the issue if PSL's, friends, availability, margins etc are all taken care of?

Well, this is very important detai, however, at this stage I am worried about the general approach, the rest is something that will be agreed in writting.

From my point of view all I care is to make sure that i can use the current ltd to reduce some of the initial expenditure, and then whatever happens I end up with some IP that my ltd can use, if everything goes belly up.

The projects that are likely to be undertaken will be fixed priced, in the range of 5-15 man day effort. So availability is not going to be a major issue. In the end... If they are a no show, my exposure is limited (or rather more manageable).

Margins is the weakest point maybe, I can't think of a way to achieve a fine enough granularity and be as tax efficient as extracting dividends, without getting into more complex scenarios.

Overall I have a much better idea of what to discuss with my accountant. Not going ahead is also an option, so will see how it goes.

Thanks again for everybody's input, it was really useful.

Regards,
George

[northernladuk]

So the issue if PSL's, friends, availability, margins etc are all taken care of?

[georgeg]

Hello all,

Really happy with everyones responses!

I think that the a fair option is as follows:

Incorporate new ltd.
Cotracts are dealt between current ltd and end client.
Current ltd subcontracts new ltd.
All IP relating to the new pieces of work is shared between current and new ltd.
At the point of take off (if it happens) shares of the new ltd are re-issued/re-distributed and IP is transfered fully to the new ltd.

Any resource/infrestructue shared by current ltd, can be charged etc etc.

I think I have a more clear idea what to talk about with my accountant and splicitor.

Cheers,
George

[JB3000]

By taking advice from an accountant or advisor with experience, who has been around the block a few times.

Sorry, sounds a bit huffy, but if you are serious about developing your business you need to find an advisor and work on a presumption of trust in their advice, rather than opinion shopping online.

There's no harm looking for a second, third, fourth..........opinion on an online forum dedicated to contractors wanting to ask questions.

Gives George ideas that he can go to his advisor with and discuss them more thoroughly.

There's no harm trying to get informed and learning from the experience of other contractors who may already be in the same situation.

[Jessica@WhiteFieldTax]

Having that in mind, how would you guys approach this?

By taking advice from an accountant or advisor with experience, who has been around the block a few times.

Sorry, sounds a bit huffy, but if you are serious about developing your business you need to find an advisor and work on a presumption of trust in their advice, rather than opinion shopping online.

[MrMarkyMark]

just get your friends to bill you for the work, and you bill the end client - it's the same model that makes agencies millions

Sounds simple doesn't it.....until the client does not pay you for 3 months+, very common when you go direct.
You have to have the reserves to manage the risk of paying all your guys for those 3 months and maybe not getting paid yourself.

[TheCyclingProgrammer]

If I were you, I'd either have your friends invoice YourCo for their time (but presumably the product you're creating would be owned by YourCo so they may not like this idea) or set up a new company with all of you as joint shareholders (or whatever distribution makes sense).

Unless this new product is going to be 100% part of your own business, don't mix your business with the new one. It will only lead to headaches.

[pr1]

bit of a leap from his initial question

just get your friends to bill you for the work, and you bill the end client - it's the same model that makes agencies millions

make sure there's lots of paperwork too long for your mates to read to cover yourself

[georgeg]

Hi all,

Thanks for the swift responses!

Just a couple of clarificatiions.

My objective is not to bring a few more heads in an existing client etc etc.

My first objective is to create something like a virtual team that will build a product,. That virtual team will eventually become an independent ltd, if and when the product takes off.

Northernladuk got it spot on, but common wisdom suggests that I should steer away from such an idea, as it cam get complex, and with potentialy higher liabilities.

The reason of starting this via my ltd is to allow reuse of infrastructure / resource.

Having that in mind, how would you guys approach this?

Regards,
George

[WordIsBond]

Yikes.. I hope that isn't what he is thinking...

Pretty sure it is. That's why the protecting the warchest comes into it.

OP, yes, there's a way to do what you want.

1. Issue a new class of shares for each of your mates. Yours are A shares, mate 1 is B shares, mate 2 is C shares, etc.
2. Make sure that all shares but yours are non-voting, so you have control and can determine the dividends all by yourself. Maybe your mates are trusting enough to let you do this. Fools. But it is necessary, because if you give them votes / directorships, then they can rip off your warchest. So you have to maintain complete control.
3. Pay out dividends for each class of shares by how much each guy brings in. Mate #1 brings in £60K, takes £10K salary, you pay £10K corporation tax on the profit, and disburse the next £40K in Class B dividends (all his, but maybe he will give some of his shares to his girlfriend and minor children, just to increase the legal excitement to come).
4. Pay out dividends from your earnings and your warchest for the A shares.

This works perfectly. The only problem is that you need to set aside a massive amount of money for legal expenses, back taxes due, penalties and interest, and maybe even enough to support your family, if you have one, while you are in prison. They probably wouldn't send you to prison if you paid them everything they wanted, but who knows? Tax evasion isn't very popular these days.

[Danglekt]

Yikes.. I hope that isn't what he is thinking...

I hope not too, but it is all I can assume he means after reading his questions

[northernladuk]

I assume he is thinking about dividend distribution, and if his "warchest" (rainy day fund is a better phrase) could get raided to keep his mates afloat rather than protecting it so it would just be himself? I assume he is thinking of making them shareholders so they can get dividends, but only wants them to be able to access dividends from work untaken since they joined?

Yikes.. I hope that isn't what he is thinking...

[Underbase]

I assume he is thinking about dividend distribution, and if his "warchest" (rainy day fund is a better phrase) could get raided to keep his mates afloat rather than protecting it so it would just be himself? I assume he is thinking of making them shareholders so they can get dividends, but only wants them to be able to access dividends from work untaken since they joined?

If this is the case, then isn't it a Managed Service Company, and there is legislation to specifically stop this being "tax efficient"

https://en.wikipedia.org/wiki/Managed_service_company