Setting up a limited company by myself or with my bro? Any accountants here??

KILOCHARLIE

Hi all, just starting my first contract this week after landing a job with a bank on a self employed basis. I started as per an umbrella company but are quickly regretting the decision (despite not even handing in my first timesheet!) and was hoping for some advice please.

As well as myself on a contract for a daily rate of £145, my brother is also on the exact same contract after starting work two weeks ago. We are both interested in setting up limited companies, whether it be one each or both of us in the same one. I am unsure what would be the benefit of us both being directors of the same company or whether it may be more beneficial for one to be a director with the other as an employee of that company, but I have heard there may be a way to use this to our advantage over each having our own.

We are both low spenders but have separate finances, although both hope to both get mortgages / purchase houses in the next few years despite us being aware how hard this may be being self employed along with the current restrictions on obtaining such finance.

Furthermore, we both live at home with my mother who is currently unemployed and is in receipt of Job seekers allowance. We are both expected to pay rent to her once we start getting paid but the amount is currently negotiable and I would hope this would somehow be deductible so would be grateful for any advice. Also she has expressed a possibility of us being able to employ her under our company / companies to make use of her tax free allowance, again whether it be as a director or as an employee. I would be grateful for any advice on this matter.

Thanks all for any pointers you could give us. This looks like a great community so happy for any feedback no matter how positive/negative! I hope to learn as much as I can as there seems plenty of info to get my head around to make the best of our situation and hopefully get the best outcome for myself and my family!

Savvy_Sue

There are quite a few accountants (or those claiming to be such) around this board, but you can't rely on their advice, ie sue the pants off them if they get it wrong, because a) you have no idea if they are really accountants or not and b) you're not paying them / in a professional relationship with them.

I am not among their number, so having said that, I'd strongly recommend that you and your brother talk to a couple of firms (advice is often small, medium and large) and see what their ideas are. You'd usually get a brief consultation for free, while you work out whether they seem to be people you could do business with.

However:

KILOCHARLIE wrote: »

As well as myself on a contract for a daily rate of £145, my brother is also on the exact same contract after starting work two weeks ago. We are both interested in setting up limited companies, whether it be one each or both of us in the same one. I am unsure what would be the benefit of us both being directors of the same company or whether it may be more beneficial for one to be a director with the other as an employee of that company, but I have heard there may be a way to use this to our advantage over each having our own.

If you decide to set up a co. together rather than one each, you'd be well advised to take legal advice: generally this should be independent (ie you each see a different solicitor) because what's best for one may not be best for the other. You also need to think through the 'what if' situations: how will you divide the profits, what if one of you wants out, what if one of you is ill, what if one of you disagrees with the other and so on. For that reason having your mother involved as a director could be worth considering, so she could make the tie-break decisions. That's as long as neither of you is the golden boy who can do no wrong ...

KILOCHARLIE wrote: »

Furthermore, we both live at home with my mother who is currently unemployed and is in receipt of Job seekers allowance.

Contributions based or income assessed? Once it goes onto income assessed, I believe that your presence as adult earners in the household will be taken into account - not sure of details but you all need to be aware of that.

KILOCHARLIE wrote: »

We are both expected to pay rent to her once we start getting paid

I should hope so!

KILOCHARLIE wrote: »

but the amount is currently negotiable

Bear in mind what I said above, and be generous or move out, at least work out what it would cost to live independently before you say "HOW much?"

KILOCHARLIE wrote: »

and I would hope this would somehow be deductible so would be grateful for any advice.

:rotfl: deductible from what? the company's profits? your tax liability? I wouldn't even ask an accountant about that one. I'm not saying there are NO circumstances in which your living expenses can be offset in that way, but living at home on your first contract - I'm going to be dogmatic and say that's not one of them.

KILOCHARLIE wrote: »

Also she has expressed a possibility of us being able to employ her under our company / companies to make use of her tax free allowance, again whether it be as a director or as an employee. I would be grateful for any advice on this matter.

I'm fairly sure you can have her as a director, and you can talk to your accountants about paying her a dividend. And yes, you can employ her, but only if she does any work for you, at which point you have to pay her at least minimum wage for the hours she works, and possibly run a payroll. And either of those situations would affect her JSA.

What you can't do is say "mum is an employee" if she's not actually doing anything, and I'm guessing you can't take her to your contracts with you, even to make your tea and bring your lunch in.

so, if there's an amount of admin she can do for you - fielding your calls, keeping your accounts - then yes, there may be advantages in employing her. And I already spoke about being a director.

So, that'll do for starters, and the actual accountants will be along in the morning to correct me.

TheCyclingProgrammer

Think long and hard before going down this road...what happens when one of you is in contract and earning and the other one isn't? If you're both 50% shareholders then you'll both be entitled to an equal share of the profits by way of dividend regardless of who earned what unless you start going down the route of dividend waivers which is when things get complicated.

Your mum can be a company director if you want her to be but if you want to pay her a salary it has to be wholly and exclusively for business purposes or it won't be and allowable expense against the company's corporation tax bill. In short, that means she actually has to be doing something in return for her salary and it shouldn't be excessive.

I'd avoid going down the route of making your Mum a shareholder unless she is going to be directly involved with and contribute to the business in some way. And even if she is a shareholder, any dividends she receives will be hers, not yours. There is an old piece of legislation called the "settlements legislation" which has been used in the past to attack spouses who share profits where one spouse is the primary earner and the other is gifted shares in the company - although HMRC haven't been very successful on the whole.

I won't go into all the details, but in short if a shareholder isn't your spouse then in most normal circumstances you shouldn't be caught by the legislation but if the shares have been gifted with conditions attached such that your Mum's dividend income made its way back to you i.e. you were simply using her shares to divert income back to yourself, then you could well be caught and your Mum's dividends will be taxed on you as if they were yours.

In summary, I wouldn't bother making your Mum a director and I certainly wouldn't go messing around giving her shares and I'd seriously consider you and your brother setting up your own companies instead.

Finally, I have to ask...you don't say where you live or what you do but £145 is a pretty low contracting rate and equates to around £35k gross in salary terms - except you get none of the benefits, rights and relatively higher job security of being a permanent employee. Wouldn't you be better off taking a permanent job?

anamenottaken

Savvy_Sue wrote: »

I'm fairly sure you can have her as a director, and you can talk to your accountants about paying her a dividend. And yes, you can employ her,

To add:
A dividend is paid to shareholders. A director does not have to be a shareholder. A fee can be paid to a director without them being an employee. Directors can also be employees.

zygurat789

anamenottaken wrote: »

To add:
A dividend is paid to shareholders. A director does not have to be a shareholder. A fee can be paid to a director without them being an employee. Directors can also be employees.

A director is an officer of the company and is, therefore by definition, an employee.

zygurat789

TheCyclingProgrammer wrote: »

Think long and hard before going down this road...what happens when one of you is in contract and earning and the other one isn't? If you're both 50% shareholders then you'll both be entitled to an equal share of the profits by way of dividend regardless of who earned what unless you start going down the route of dividend waivers which is when things get complicated.

Class A shares and class B shares would be much easier

Your mum can be a company director if you want her to be but if you want to pay her a salary it has to be wholly and exclusively for business purposes or it won't be and allowable expense against the company's corporation tax bill. In short, that means she actually has to be doing something in return for her salary and it shouldn't be excessive.

The wholly and exclusively test is for employees who are not directors. The directors' job is to run the company, this may be just being a deciding vote.

I'd avoid going down the route of making your Mum a shareholder unless she is going to be directly involved with and contribute to the business in some way. And even if she is a shareholder, any dividends she receives will be hers, not yours. There is an old piece of legislation called the "settlements legislation" which has been used in the past to attack spouses who share profits where one spouse is the primary earner and the other is gifted shares in the company - although HMRC haven't been very successful on the whole.

It would be pointless paying a dividend, a salary up to £7956 would be much more tax efficient.

I won't go into all the details, but in short if a shareholder isn't your spouse then in most normal circumstances you shouldn't be caught by the legislation but if the shares have been gifted with conditions attached such that your Mum's dividend income made its way back to you i.e. you were simply using her shares to divert income back to yourself, then you could well be caught and your Mum's dividends will be taxed on you as if they were yours.

Three £1 shares. Cost £1 each. Surely Mum could afford that?

In summary, I wouldn't bother making your Mum a director and I certainly wouldn't go messing around giving her shares and I'd seriously consider you and your brother setting up your own companies instead.

Finally, I have to ask...you don't say where you live or what you do but £145 is a pretty low contracting rate and equates to around £35k gross in salary terms - except you get none of the benefits, rights and relatively higher job security of being a permanent employee. Wouldn't you be better off taking a permanent job?

Two unmarried lads still living at home and Mum is working age. My guess would be they are not that old £145 per day is a lot of money, over 6 times the state pension.

pleasedelete

with such a low turnover c 35K you wont really have any benefit (bit less corporation tax) by employing your mum or having her as a director as any tax you pay will be very small

Expenses ?
Salary £10,000 or less (you pay yourself this every month - no tax and currently no employers NI but small amount personal NI). You can avoid NI altogether by paying less.


so maximum profit £25k but will be much less (allow £1000-20000 for fees to run company- insurance, accountant, payroll)

so you will not pay personal tax and MAXIMUM £5k in corp tax but in reality much less.

Look on one of the contractors sites- they have calculators that explain tax etc

you seem to be suggesting having your mother as a director/paying her in lieu of rent. Long term this could be an expensive thing. If you then earn 100k- she would get half (on a 50/50 share) after tax

[Deleted User]

zygurat789 wrote: »

A director is an officer of the company and is, therefore by definition, an employee.

Incorrect ... in part.

A director is a officer of a company.

However, deing a director (or any other officer of the company) does not necessarily make that person an employee of that company.
How do I know? Because I am a director of a number of companies, but am not an employee of them.

Think about it. There are many flats managed by management companaies. It is not unusual (in the better managed instances) that the flat owner on buying the leasehold to the flat also buys an individual share in the management company. That way they can have a say (e.g. at the AGM) in how that management comapny is being run. Directors are often appointed from those residents to actually run the company. I have not known them to ever be employees of the management company.

Being a director does not, of itself, make that person an employee of the company. A directorship is an office, not necessarily an employment...

Source: http://www.companylawclub.co.uk/topics/directors_as_employees.shtml

[Deleted User]

KILOCHARLIE wrote: »

Hi all, just starting my first contract this week after landing a job with a bank on a self employed basis. I started as per an umbrella company but are quickly regretting the decision (despite not even handing in my first timesheet!) and was hoping for some advice please.

As well as myself on a contract for a daily rate of £145, my brother is also on the exact same contract after starting work two weeks ago. We are both interested in setting up limited companies, whether it be one each or both of us in the same one. I am unsure what would be the benefit of us both being directors of the same company or whether it may be more beneficial for one to be a director with the other as an employee of that company, but I have heard there may be a way to use this to our advantage over each having our own.

We are both low spenders but have separate finances, although both hope to both get mortgages / purchase houses in the next few years despite us being aware how hard this may be being self employed along with the current restrictions on obtaining such finance.

Furthermore, we both live at home with my mother who is currently unemployed and is in receipt of Job seekers allowance. We are both expected to pay rent to her once we start getting paid but the amount is currently negotiable and I would hope this would somehow be deductible so would be grateful for any advice. Also she has expressed a possibility of us being able to employ her under our company / companies to make use of her tax free allowance, again whether it be as a director or as an employee. I would be grateful for any advice on this matter.

Thanks all for any pointers you could give us. This looks like a great community so happy for any feedback no matter how positive/negative! I hope to learn as much as I can as there seems plenty of info to get my head around to make the best of our situation and hopefully get the best outcome for myself and my family!

If you decide to operate through a limited company, I would suggest you each form one otherwise it will be difficult to pay you for what you have both individually earned (you say you have separate finances)
If you both form a single company and one of you is just an employee (or if you both elect to pay yourself a salary only) then I don't see any big benefit compared to the umbrella company you are already an employee of.

As shareholders of a company, you can only pay a dividend pro-rata to the indivual shareholdings of that particular company. e.g. if you both have 1 share each, then you would need to pay an equal dividend to both.

(You could, I suppose, hold different classes of shares which could pay different dividend rates, but it still won't be easy)

I can't see how paying for your private rent/upkeep to your mum could ever be considered a legitimate deduction from company expenses or otherwise a tax deductable expense.

The taxman looks carefully at tax avoidance measures, and simply paying your mum money as a pseudo-employee willl probably be spotted and bring a full HMRC examination of all tax affairs of everyone involved (which believe me you really don't want). If she was appointed a director, that would help ... but does your mum really want to be an officer of the company? (There are some legal responsibilties a director assumes personally, even though the company has limited liability)

Your mum could become a shareholder of your company, and so become entitled to dividends, but again these would be paid pro-rata to your individual holdings. If she holds more shares than you, she could even oust you as the director
Again, holding different classes of shares may be a complicated way around matters.

I would suggest you seek the advice of an accountant (perhaps individually?). However, think twice about taking up the offer of an accountant forming a limited company, or companies, for you as they tend to be quite expensive. There are pleanty of agents on the web who will galdly form a limited company very cheaply. (e.g. £20 or less each) ... but you need to tell them what exactly you want/need, and that is where the accountant's advice comes in.

zygurat789

Starline wrote: »

Incorrect ... in part.

A director is a officer of a company.

However, deing a director (or any other officer of the company) does not necessarily make that person an employee of that company.
How do I know? Because I am a director of a number of companies, but am not an employee of them.

Think about it. There are many flats managed by management companaies. It is not unusual (in the better managed instances) that the flat owner on buying the leasehold to the flat also buys an individual share in the management company. That way they can have a say (e.g. at the AGM) in how that management comapny is being run. Directors are often appointed from those residents to actually run the company. I have not known them to ever be employees of the management company.

Source: http://www.companylawclub.co.uk/topics/directors_as_employees.shtml

Semantics.
Any money you receive from any of these companies should, legally, be subject to PAYE.

KILOCHARLIE

Many thanks for the replies guys, really good info so far and its a steep learning curve for me so slowly getting my head round it all. Will take the advice on board about my mum but yes any wage she would be paid would be for admin, invoicing etc so surely this would be ok with hmrc? She would be doing this anyway even if she wouldn't be paid at all, although surely if she had shares rather than wages as an employee there wouldn't be any monetary difference for her seeing as in either scenario she would be receiving far less than the 10k tax threshold?

Still grateful for any advice regarding whether its better for both of us to be directors or if its better to have one as a director and one as an employee of the company. As I understand it we can both have 50/50 shares in the company either way (classed a and b respectively should we ever wish to change the ratio) but I am unsure of the other implications. I appreciate the chance of it getting messy if we were to fall out but thats something we both feel very unlikely and something are willing to ignore even if just for the purposes of our query for the time being.

If one of us were an employee of the other with wages of less than 10k does that mean more work for an accountant? Does paye have to be a method then?

Thanks again for any help and again grateful for any further advice.