Three shareholders - one investor, tax liability for others?

[nrc]

I am becoming a director/minority shareholder in a relatively new (a month or so old) company currently owned completely by my co-director. There is a third shareholder (his wife) who will receive equity in return for a cash investment.

We have been advised by my business partner's accountant that we cannot treat the cash investment as equity capital as both me and my co-director would be liable for income tax under the employment-related securities legislation, and must therefore treat it as loan capital instead.

I am slightly uncomfortable awarding equity in return for just providing a loan rather than a straight equity purchase. Seems that they would have the security of being able to call in the loan, yet also the upside of sharing in any growth/sale of the company without any of the associated risk.

I am sure this situation is not unusual (i.e. two directors contributing time in return for equity and one 'sleeping' shareholder contributing money), but can't believe that a loan is the only way to structure it.

Does anyone have any ideas on how to get around this?

[section 44]

It might be worth seeking independent tax advice.

Who does your business partner's accountant act for? What may be good for the company and/or ehe existing shareholder may not also be good for you and vice versa (e.g. income tax liabilities that would be subject to PAYE).

[ensigntaxation]

On the assumption that the cash he's injecting is giving him a purely market value interest in the company, I cannot see where the Employment Related Securities issue is here?

What type of business is this? How much equity is looking to get? Assume he's not going to be remunerated in any other way?

Any Qs then let me know

Cheers
Andy