Company Director Position - How Should It Work?

Hi there,

I was not sure where to post this but had seen similar topics covered here.

The high level topic is that I have been offered the chance to become a company director, but in terms of getting paid, it would be very different to my current/previous roles.

I would jump at the new role if it was not for the fact that I earn quite a good salary as a permanent employee with good benefits. The company director role would mean doing what I want and that is important, but money is also important as I have a family.

So, down to the questions I have... I am not sure how it works or what the options are fully, especially around legal or tax subjects.

This is what I know about the new role:

- There is currently a small US-based company, my friend and former colleague is a director there - he offered me the job.
- They want me to open a UK branch and be the managing director there.
- There will be no salary, but profit sharing annually.
- I am free to do contracting work (with existing clients that I work for now) and bill through the company. They will take 30% to put into a "pot".
- I can either continue being a lone contractor and director or I can hire extra contractors to do the work (maybe there is too much) and they also put 30% into the "pot". This would be my incentive to generate more business and hire staff, essentially growing the company and profits and meaning bigger dividends/bonuses.

This is not necessarily 100% accurate, but is my current understanding at a very high level.

In terms of taxes, it would not seem quite right to have no salary but receive an annual dividend. I do not have a problem paying taxes and pay a lot right now! The US branch seem to do things this way though - no salary and annual dividends - is this normal?

Now, as it happens, I cannot wait for an annual dividend of unknown amount when I have bills to pay so I would either need large funds in the bank or to start contracting straight away (this is the sensible option as it gives me monthly income and puts money in the pot).

If I am contracting, presumably billing through the parent company can/will take care of tax - is this a standard thing to do? Will contracting mean that taking my annual dividend is ok as I am earning and paying taxes throughout the year? Any other taxes to be aware of?

Apologies if this makes little sense, I have always had permanent jobs and my biggest question to answer for myself is: Can I just do contracting work and pay taxes and also receive an annual dividend, but essentially function in the same way as a permanent employee or will I have to do a load of accounting stuff regarding the UK branch, offsetting expenses and costs, etc.?

To me, this seems like a complex job to have, but I am up for it as long as I know what I am in for! I worked out that if I worked 3 days per week and took 6 full weeks off, I would earn more than I earn now, so it seems like this could work pretty well for me if I give it enough thought.

Many, many thanks,
S
To err is human, but it is against company policy.
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Comments

  • motorguy
    motorguy Posts: 22,452
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    Sounds all too weird for me.

    Apart from anything, we have IR35 legislation here in the UK so if you're "contracting" into a company and are acting as an employee, you are taxed as if you were an employee, so this notion of just drawing "dividends" may not work.

    Also, there is no particular reason why dividends are paid yearly - i can draw dividends daily if i so chose.

    Far too open ended for my liking. Work for a year and you "might" get a dividend?

    I would also look into what happens if you worked for nine months and threw the towel in - do you still get your "dividend"

    Wouldnt do it for me.

    Sounds like some sort of pseudo contracting agency type thing - far too risky.
  • motorguy
    motorguy Posts: 22,452
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    Samsonite1 wrote: »
    I worked out that if I worked 3 days per week and took 6 full weeks off, I would earn more than I earn now, so it seems like this could work pretty well for me if I give it enough thought.

    Many, many thanks,
    S

    What does "work" involve? Being on site contracting or being a Director?
  • Samsonite1
    Samsonite1 Posts: 572
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    Thanks for your responses. Work involves consulting, either onsite or remotely (phone calls, documents to write up, etc.).

    It is not as weird as it sounds - this guy (my friend offering the position) left my current employer a while ago and said that he was doing this and said he would get in contact when it was all up and running. I have worked with him at 3 companies over the past decade and he is doing this for himself and is offering me the same life-style and opportunity. He got me my current highly (relatively) paid job, but we were acquired by another company and so things are different to what we signed up for.

    In terms of dividends or bonuses, I think that is a question(s) I need to ask him - I am very unclear on this. The purpose of the 30% of any income going to the company is to cover company expenses then profits are shared out. He did mention various options like shares. He may even have mentioned that it would be different in the first year - again I obviously need to find out more detail on these aspects.

    I suppose I partly wanted to know how working as a Director and a contractor works as a concept - people do seem to do this quite a lot in the software industry.

    The slight extra security I have is that there are clients that want me to do this because they want me to commit to say 3 days per week for the next 6-12 months. In my current company I cannot choose and I get thrown onto other projects, leaving the clients to say "when can we have him next, we are in the middle of a big project?". So I have buy-in to be a contractor in any case. The Director option would be in addition - ok, I would lose 30% of the hourly rate, but would get a bonus of some kind and presumably save on admin and billing work, paying for those services or taking time to do it all myself.

    The advice my friend gave me was to approach one of the clients who wants this and tell them that I am planning on doing this - then I can get more of a commitment to how much contracting work I can secure immediately. I think I am good for 12 months of work just with one client - if I can work 3 days a week for a year then that gives me 2 days to do the things that I should as a Director (generate more work, hiring someone, admin, etc.).

    I suppose the angle I am coming from is this - I have often thought of going solo as there is a demand for it and you can make plenty of money. Taking up my friend's offer gives me some extra benefits and even security. I could even start off by myself and ignore the offer but would actually feel better to have someone else in my business who has already taken the plunge...
    To err is human, but it is against company policy.
  • paddyrg
    paddyrg Posts: 13,543 Forumite
    I don't see what benefit giving your friend's company 30% gives you? They're not a trusted brand to solicit clients, so what advantage is there for you? IT consultants frequently run their own limited companies, you can draw minimum wage (or not as you choose), then after tax take a dividend, lend yourself money against a dividend, etc. Tax-wise the savings aren't huge - it'll save you a bit of NI but that's more or less it. The overall benefit is charging contractor rates (pretty much expect to take your annual salary, knock off three zeroes, and that's your hourly rate - unless you can blag more!) in lieu of job security. Losing 30% will mean after taxes etc, you'll be marginally better off, but for no measurable benefit.
  • Samsonite1
    Samsonite1 Posts: 572
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    Thanks for the response Paddyrg. I suppose if I were to say what the benefits were of giving 30% to the company would be (bearing in mind that I would be a shareholder):

    - Money would be going back into the company to pay for things the company needs. If I worked for myself I would have to fund this myself too. At least it is protected that 70% of their hourly rate (£100) goes to me, so £70 ph (less taxes, etc.)
    - I get a dividend from the profits as a Director. Regarding this pot, there are other contributors/consultants who work for directors and they are charged out at £100 - if they are contractors they get an agreed rate, but probably less than £70 (I am more expensive) and so the rest goes into the pot.

    The second point is the main point. I get 70% of what I can get for myself, but the dividend pot is not a one-to-one Director relationship, it is fed into by each resource. This is exactly how my current company operates - my hourly rate is £125, but being permanent I get a salary so the rate is irrelevant and I do not get profit share from 200 consultants feeding their £125 into the pot.

    As mentioned the long-term plan for this Director role is to hire more people and contribute to the pot - then depending on how big the dividends become, I may not need to work (e.g. the contracting) other than managing the other staff and generating business. Contracting would still be there should I need to.

    My friend has two employees bringing in around £400k per year (he's been doing it for nearly a year) - they actually only get around £30ph because that is very high for the area they live in - they get around £60k per year and 4 weeks' holiday currently. So, that means £280k is going into the pot without him doing any work.

    As I understand currently - you get shares and so are guaranteed a minimum percentage of dividends, then performance related bonus-type stuff (e.g. how much revenue you bring in) counts towards what else you get. Obviously if there is no profit then you get nothing, but to be honest consulting is very profitable - it's a service that requires very little expense - almost all expenses are covered by the client too.

    Anyway, it seems pretty attractive to me still, but I do take the comments on board. Perhaps my explanation of the long term plan of having your own consultants and engineers to do the work and bring in the same hourly rate (but more money for the pot) changes things?

    Thanks!
    To err is human, but it is against company policy.
  • paddyrg
    paddyrg Posts: 13,543 Forumite
    Hiya,

    I'm just saying it looks like you can join them and chip 30% into the pot, or go solo and that £30 every hour will VERY quickly pay for that overhead plus kit plus recruiting others. And if you bring in others, you're not giving away £30/hour for each of them.

    Yes, you'd get some back as a shareholder if there's a dividend, but you're taxed on that anyway, and it'll be less than the £30/hr you've paid into the pot. And that 30% going into a US corp is probably paying workers comp and medical insurance for employees, so your 'deal' is worse overall, even with everything else being equal. Most likely you'll have to set up a UK ltd company anyway as a billing vehicle (or pay two lots of international bank charges on a US round trip), so why not do that without giving away £30/hr?
  • LittleVoice
    LittleVoice Posts: 8,975
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    Samsonite1 wrote: »
    Thanks for the response Paddyrg. I suppose if I were to say what the benefits were of giving 30% to the company would be (bearing in mind that I would be a shareholder):

    - Money would be going back into the company to pay for things the company needs. If I worked for myself I would have to fund this myself too. At least it is protected that 70% of their hourly rate (£100) goes to me, so £70 ph (less taxes, etc.)
    - I get a dividend from the profits as a Director. (No, dividends (if any) would be paid to you as a shareholder, if you are indeed a shareholder. If paid to you as a Director, it would be a bonus (subject to tax and NI).) Regarding this pot, there are other contributors/consultants who work for directors and they are charged out at £100 - if they are contractors they get an agreed rate, but probably less than £70 (I am more expensive) and so the rest goes into the pot.

    The second point is the main point. I get 70% of what I can get for myself, but the dividend pot is not a one-to-one Director relationship, it is fed into by each resource. This is exactly how my current company operates - my hourly rate is £125, but being permanent I get a salary so the rate is irrelevant and I do not get profit share from 200 consultants feeding their £125 into the pot.

    As mentioned the long-term plan for this Director role is to hire more people and contribute to the pot - then depending on how big the dividends become, I may not need to work (e.g. the contracting) other than managing the other staff and generating business. Contracting would still be there should I need to.

    My friend has two employees bringing in around £400k per year (he's been doing it for nearly a year) - they actually only get around £30ph because that is very high for the area they live in - they get around £60k per year and 4 weeks' holiday currently. (Seems generous for a US company to give so much holiday.) So, that means £280k is going into the pot without him doing any work.

    As I understand currently - you get shares and so are guaranteed a minimum percentage of dividends, then performance related bonus-type stuff (e.g. how much revenue you bring in) counts towards what else you get. Obviously if there is no profit then you get nothing, but to be honest consulting is very profitable - it's a service that requires very little expense - almost all expenses are covered by the client too.

    Anyway, it seems pretty attractive to me still, but I do take the comments on board. Perhaps my explanation of the long term plan of having your own consultants and engineers to do the work and bring in the same hourly rate (but more money for the pot) changes things?

    Thanks!



    Are you being blinded by the bright light of having the title "Managing Director"?
  • Samsonite1
    Samsonite1 Posts: 572
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    Are you being blinded by the bright light of having the title "Managing Director"?

    That makes no sense at all - if I wanted a particular job title I could start a company and call myself anything I wanted. My main motivation would be for a different lifestyle, in particular - not having to fill daily time-sheets meticulously, poor management managing things that I can manage much better (and end up doing to undo the poor management) - this list goes on. It's about the job, not the money and not the title - the money is only important in so far as not wanting to make financial compromises.

    Thank you for your other comments.
    To err is human, but it is against company policy.
  • p00hsticks
    p00hsticks Posts: 12,668
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    edited 29 May 2015 at 11:03PM
    I don't quite understand the bit about the 30% in the "pot" or what benefits your friends set up is offering you - if you're going to go contracting, it woudl seem simpler to just set up yourself.

    It's been a few years since I was an IT contractor, but this is basically how it worked in my day....

    Set yourself up as a limited company - you can buy one off the shelf for about £20. You'll be a director and a shareholder.

    You then negotiate work with whoever you want - any contract for services will be between them and your company, not you as an individual. Your company them invoices for your services and the money gets paid into your company.

    You can choose how you remove money from the company - you can be set up as an employee and take a regular salary, and/or pay a shareholder dividend as and when you wish. There are pros and cons to each method - taking a reasonable salary will mean both you and your company paying NI and oyu paying income tax - but that will entitle you to a state pension further down the line. If you don't take a salary, then your company will pay corporation tax on the profit in the company (which can then get passed onto the shareholder(s) as a dividend).

    A decent accountant who is used to dealing with IT contractors should be able to set up and run a payroll for you, audit the accounts and talk you through the various things to look out for (corporation tax, company house forms etc ) - they'll usually be able to sell you an off the shelf company to start with as well.

    As motorguy has mentioned, you especially need to ensure you stay the right side of the IR35 legislation - that is, be able to show that you are genuinely a contractor and not an employee of the companies to whom you supply a service.
  • Samsonite1
    Samsonite1 Posts: 572
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    Thanks p00hsticks. I find this quite amusing really - the point is that I am not going to really be a contractor in the long-term, that is just a short-term solution for continued income. The point is that as a Director I will hire my own resources to bring the money in and fill the pot. The 30% (actually more probably) from each resource will eventually be contributing to my only income if I do not do a day of work. The contracting is something that will tail off with the more resources I have doing the work for me.

    To reiterate, I do not want to be a contractor - I can do that tomorrow if I want. This is about being a Director (I do not care about the title though) but not being the worker, just directing and generating business - my friend does not work already with just 2 resources doing the work. The 30% is the important difference.

    This all brings me back to an earlier question - would stopping my contracting work make my dividends "a bit dodgy" in the eyes of tax laws? In which case another way would have to be sought?

    Thanks
    To err is human, but it is against company policy.
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