Most tax efficient way to take on a business partner

[Dee1]

Hi,
I have a limited company which has been going for a year and a half now. I am the sole director who is also on the payroll, paying a £115 per week (just enough to qualify for the NIC). The busiess is turnining over around £85k-£95k and the net profit is around £20k (before CT). I'm quite stretched and would like to take someone on to share the work. There is a suitable candidate, who has his own part time business but would like to join up with me. I know that we would work well together (we both do similar work). However, I can't afford to pay him a good wage. I rather pay him in a tax efficient way, ie maximising take home pay, minimising tax burden. So I thought I might take him on as a director and give him class A shares, so that his basic wage which would be same as mine could be supplemented with a dividend, independently from mine. But I have several querstions:

1) is this technically/ legally ok? Can there be a company with 2 directors who are each paid below min wage (I am aware that a one-man-band co'y can pay however much or little they like to their director in terms of wages)? Would HMRC have a problem with this? Are there any conditions we'd have to satisfy?

2) what do I need to do to set up this change, ie alter the Articles of Association, etc? Do I need legal advice/pay for a lawyer? Again, I could do without this expense, unless absolutely necessary. Do I need to put a provision in Articles for an event where he wants to leave or for when we decide that the the arrangement should to cease?

3) If we can't be both directors and employees, what's the alternative?
Many thanks for helping the neebie on the forum.
Dee

[Incredulum]

1. Yes, provided there is no employment contract.

2. I seriously think that if you are issuing shares in your company to a third party that you should have a lawyer's involvement.

[Dee1]

Thanks for this. In this situation, would we be not breaching the minimum pay legislation? Will we be both seen as employees?

What do you mean by "provided there is no employment contract"? In the situation above, what would the £115 per week count as? Wages or Directors' remuneration? Currently, it's just 1 director, me, and in 2010-11 I run a payroll and paid some NIC (1A). I assume that I'm therefore an employee of the company. But I have no contract. Could the other guy work on exactly the same terms?

Logically thinking, I'd say we're both directors and can decide to be paid however much or little we want or can afford to. But are there any catches (esp in relation to the min wage)?

I find the law (tax and company law) in this area quite confusing. I wonder how expensive it'd be to seek professional help.

Thank you again for your advice.

[Incredulum]

Yes, provided there is no employment contract.

[towat]

Directors are exempt from minimum wage legislation, I can't see any problems with your proposals as long as you don't get caught by the IR35 provisions.

My main concern would be how to extricate yourself if the business relationship turned sour, you need to protect your existing business by careful use of shares or maybe a new company to operate the joint venture that could be hived off if it didn't work out, leaving your existing business unaffected.

Sorry to be so pesimistic but I have seen so many of these types of arrangements go bad, you really need to protect what you already have, by all means give it a go just have something to fall back on.

[taxationuk]

I would suggest getting the articles redrafted to include drag & Tag along provisions and also Bad leaver clauses. I would not issue your new partner the same class shares as yourself but would suggest an ordinary B share. This way you can pay the same amount of dividends to both classes of share, but you can also factor in provisions in case things do not go to plan.

Kind regards

Terry