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

[BlasterBates]

In the examples I have seen with clients, no-one has yet seen any return and most have had to write off their 'investment'.

I seem to remember from my business studies that something in the region of 90% of all startups fail.

[Nixon Williams]

Are you saying it isn't a good idea to hold them in the company then Alan? Or just pointing out the complexities of it? Bearing in mind this share is in recognition for work done surely holding them in the company is the only way of doing this? If they were gifted or bought then I could understand keeping them personally but they aren't. Doesn't that make all the difference here?

On the face of it, holding the shares through the company is probably the best route. However without the full facts it is not easy to give a certain answer.

I would advise caution before entering into payment arrangements of this type. They are common with start ups and so you are taking a risk that the business model will work.

Decide whether you are contracting for the money, in which case I would insist on payment in cash, if you are contracting as an entrepreneur, realise what you are getting into and that you may never see any cash.

In the examples I have seen with clients, no-one has yet seen any return and most have had to write off their 'investment'.

Alan

[BlasterBates]

I wouldn´t get too fussed at the moment because it the shares probably won´t be shooting up soon and I suspect the dividend will be pitiful. If it "became a problem" I would be popping the champagne corks, regardless of how it´s taxed.

Go and see your accountant and sort it out with him. I suspect you could do it either way.

[d000hg]

I see no reason you would have to have your Ltd own the shares as NLUK suggests. You have no contract and haven't been paid so you are quite at liberty to say you were working off your own bat rather than through your Ltd, and arrange shares to be gifted to you personally.

[nfoote]

Hmmm sounds like there's a lot more to it, as there always is with anything I suppose. Lots of exemptions and things to consider. I hadn't considered the option of setting up another company to be a holding/investment company... that could be an idea keeps things separate from the normal business but still allows me the control. Obviously will need to go over it all in detail with the accountant.

He thought about it when he agreed to do the work, I imagine. It would hardly be workable he suddenly demands 2 year's pay at this stage... clearly the startup has no money with which to pay him anyway!

Investing in a startup is a valid business plan - it's like diverting your time into your plan B if you don't want to do it all on your own - although doing so with nothing on paper sounds rather dodgy to me.

Correct and correct, there is no money right now (and hasn't been for a while), so its either equity or nothing. Investing my time is exactly how I see it, maybe it won't pay off and I've wasted my time, maybe it will and I can enjoy my future time a bit more. There is no reward without risk.

[d000hg]

Surely it is the point? He has to think if that method of renumeration is going to be worthwhile and if not push them for cash.... Wouldn't be the first internet start up to go under after a year or two leaving everyone with nothing.

He thought about it when he agreed to do the work, I imagine. It would hardly be workable he suddenly demands 2 year's pay at this stage... clearly the startup has no money with which to pay him anyway!

Investing in a startup is a valid business plan - it's like diverting your time into your plan B if you don't want to do it all on your own - although doing so with nothing on paper sounds rather dodgy to me.

[ClearSky Accounting Dan]

Also worth looking at the Substantial Shareholding Exemption if held by the company. A gain on some shares held can be exempt from tax if the vendor company owns at least 10% of the ordinary shares.

More info here:

CG53005 - Substantial shareholdings exemption: introduction - brief summary of basic structure and meaning of general terms used

[northernladuk]

The OP hasn't clarified the way in which the shares will be handed over but in terms of holding them in the current Ltd. .

I don't see that. Option B is for him to personally own 10% of the client so that wouldn't be his LTD holding them.

[DaveB]

Are you saying it isn't a good idea to hold them in the company then Alan? Or just pointing out the complexities of it? Bearing in mind this share is in recognition for work done surely holding them in the company is the only way of doing this? If they were gifted or bought then I could understand keeping them personally but they aren't. Doesn't that make all the difference here?

The OP hasn't clarified the way in which the shares will be handed over but in terms of holding them in the current Ltd. in the long term it could be an issues if the client becomes successfull to the point that dividend income from the shareholding becomes a significant proportion of the Ltd.'s income. This could lead HMRC to see it as an investment vehicle rathwer than an operting Ltd. co whch has implications for taxation and regulation.

IANAA but to me it would seem sensible to set up a ltd simply to act as the holding company for those shares, wholly owned by the OP. This gives control over dividend payements, dosnt impact on personal taxation, doesnt complicate the running of the current LTD and enable clear seperation of the income streams.

If needed this company could buy the shares from the current Ltd or the OP personally at face value (minimal at the moment) to ensure clear transfer of ownership.

Then again I could be talking out of my arse. It wouldnt be the first time.

[northernladuk]

Not really the point when he's already done the work!

I was considering a similar question regarding setting plan B up as its own Ltd. My concern was, that if company A owns B, wouldn't you get taxed on the dividend twice... B issues a dividend on taxable profit, this dividend then counts as profit to A and gets taxed again... before A issues a dividend which then attracts personal tax.

Is there an exemption or something... [EDIT] is that what NW is commenting on above?

Surely it is the point? He has to think if that method of renumeration is going to be worthwhile and if not push them for cash.... Wouldn't be the first internet start up to go under after a year or two leaving everyone with nothing.

[d000hg]

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

Not really the point when he's already done the work!

I was considering a similar question regarding setting plan B up as its own Ltd. My concern was, that if company A owns B, wouldn't you get taxed on the dividend twice... B issues a dividend on taxable profit, this dividend then counts as profit to A and gets taxed again... before A issues a dividend which then attracts personal tax.

Is there an exemption or something... [EDIT] is that what NW is commenting on above?

[northernladuk]

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

Are you saying it isn't a good idea to hold them in the company then Alan? Or just pointing out the complexities of it? Bearing in mind this share is in recognition for work done surely holding them in the company is the only way of doing this? If they were gifted or bought then I could understand keeping them personally but they aren't. Doesn't that make all the difference here?

[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

[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?

[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.