Query on forming a limited company in the services industry

J

JamesB

Guest
Hi AAM users,

I'm currently a contractor (sole trader) in the services industry. I am currently setting up my own limited company as many of my clients will not hire sole traders and I have 1 or 2 questions if anyone could kindly answer them.

Firstly, I am told that the normal way to set this up is to have 2 directors and issue 100 shares in some proportion between the two people. Having read a few threads here I am led to believe that leaving money in a services company and distributing in later years (eg next year if I decided to take a year off to travel the world) is not a good idea because of an extra tax on top of the 12.5% because I'm in the services industry. Also, distributing wages as dividends is also not a good idea from what I read.

Q1:
My question is, say for example I were to make my mother a director because I need 2 directors. It wouldn't really matter what proportion I issue the shares in (provided I give myself more than 50%) because I don't intend to leave money in the company hence the company is worthless?

Q2:
Secondly, my mom is a housewife so could I legally pay her a wage/salary although she wouldn't really be doing anything for the business (just say she is doing secretarial work or the equivalent)? Can I pay whoever I want a salary?

The reason I thought that there may be controls on these things is that couldn't a director just pay their unemployed friend a salary, who then returns that money to that director effectively reducing their overall tax allowance? (not that I have the slightest intention of doing this!!)

Q3:
Finally, I'd just like to ask if there is anything else I should consider when setting up my limited company for the first time? I intend to stay contracting for the long term and would really like to ensure that I get this set up correctly first time.

Any help would be very much appreciated.

James
 
JamesB said:
Q1:
My question is, say for example I were to make my mother a director because I need 2 directors. It wouldn't really matter what proportion I issue the shares in (provided I give myself more than 50%) because I don't intend to leave money in the company hence the company is worthless?
Click to expand...

If you give your mother more than 15% of the share capital, she would become a proprietary director, and be obliged to file a self-assessment tax return. You can issue all of the shares in a Ltd company to yourself (it'd then be a Single member Ltd company), and this is what you should do really, unless for some reason you want your mother to own a share in your company? So by all means, have her as your 2nd director (since you must have at least 2), but don't complicate things by making her a shareholder.

JamesB said:
Q2:
Secondly, my mom is a housewife so could I legally pay her a wage/salary although she wouldn't really be doing anything for the business (just say she is doing secretarial work or the equivalent)? Can I pay whoever I want a salary?

The reason I thought that there may be controls on these things is that couldn't a director just pay their unemployed friend a salary, who then returns that money to that director effectively reducing their overall tax allowance? (not that I have the slightest intention of doing this!!)
Click to expand...

You're right and there are controls on these things. One being that if the level of salary is unreasonable for the type of work performed (or supposedly performed) then you could find it would not be accepted as a business expense.

Also, if you are paying money out of the company to someone as a salary, it then becomes part of their taxable income. Now if you have a friend who is unemployed, this means that they will presumably be either drawing JSB (taxable) or JSA (not taxable but means tested).

So leaving aside the fact that it's fraud and money laundering, if you pay a salary to someone on JSB, firstly you affect their entitlement, since they must sign off for at least part of the week, and secondly you increase the level of their taxable income.

If they are on JSA, which is means tested, their means test will be affected by the amount you pay them, and their entitlement will reduce or be lost.

JamesB said:
Q3:
Finally, I'd just like to ask if there is anything else I should consider when setting up my limited company for the first time? I intend to stay contracting for the long term and would really like to ensure that I get this set up correctly first time.
Click to expand...

Nothing really except don't commit a fraud, and don't issue shares to anyone you don't have to, it'll only complicate things.
 
Thanks

Thanks a lot Mandelbrot for you’re very fast and very helpful response, very much appreciated. Most of the above queries were hypothetical so you know but I learned a lot from your response all the same. I will definitely look into a single member limited company which seems to be my best option.

Before reading your reply I had understood that if I were to set up a limited company with 2 directors then I had to give the second director shares in the company, but obviously not as you’ve just told me. My final question for you is that if the 2nd director has no shares then what power (or claim to profits if any) do they have over the business?
 
JamesB said:
My final question for you is that if the 2nd director has no shares then what power (or claim to profits if any) do they have over the business?
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In a word, none.

If they don't own any shares they have no say at an AGM, which is where directors are appointed / removed by the shareholders (i.e. you), and where directors' remuneration is determined by the shareholders (i.e. you).
 
If you use a car for your business you can claim milage costs of the company. Providing you use a proper claim form and use the civil service rates and the trips are business trips the money paid can be paid to you without deduction of any taxes or other levies. The claim form must contain the date of the journey, the no of miles/kms, the reason for the journey & the rate claimed. If you use the milage rate then you do not put any other costs relating to the car through the company - i.e. you cannot claim the milage and also the cost of the petrol.
 
Hi,

Just reading through this thread. I'm in a similar situation to OP, but I'm a bit further down the line in that I've setup my company (with me as single shareholder), and now I need to register for VAT etc.

A few questions:
1. Do I need to make myself an employee of the company in order to be paid a wage? If I don't make myself an employee are there other ways of paying myself/accessing the companies funds? Which is preferable?

2. Do I need to get an account to complete the R2 form to get registered for VAT/CT/PRSI etc? There's quite a bit on the form I'm unsure about, so I presume I should get an accountant to do it.

3. Does anyone have recommendations for an accountant!? :) Preferably in the Dublin area. I'm a contractor, I'll be the only employee of the company so I'd imagine the accounts should be straightforward. Are there accountants who specialise in contractors (apart from the umbrella companies)?

4. Having gone this far down the road, I'm as well to keep going, but I'm beginning to think it would have been much less hassle to go with one of the umbrella companies. But by and large does it work out cheaper per year if you setup your own company and use an accountant?

Thanks!
 
1. Yes you do need to register yourself as an employee to extract money from the company. Also consider paying expenses in line with civil service rates for milage, accommodation, subsistence, etc..
2. Accountant or not. This is a much discussed thread on AAM. I say you do. Others say no. I am an accountant.
3. You dont need an accountant from the Dublin area. All work can be done by post, email, fax, etc.. Employ a Dublin accountant pay Dublin prizes and get Dublin service.
4. Umbrella companies are quite usefull but by being clever and using the tax rules and regulations to its fullest you pay much less tax by using your own company.
 
simplyjoe said:
1. Yes you do need to register yourself as an employee to extract money from the company. Also consider paying expenses in line with civil service rates for milage, accommodation, subsistence, etc..
2. Accountant or not. This is a much discussed thread on AAM. I say you do. Others say no. I am an accountant.
3. You dont need an accountant from the Dublin area. All work can be done by post, email, fax, etc.. Employ a Dublin accountant pay Dublin prizes and get Dublin service.
4. Umbrella companies are quite usefull but by being clever and using the tax rules and regulations to its fullest you pay much less tax by using your own company.
Click to expand...


Thanks for that. On point 3, I'm not from Dublin originally, so maybe I'll look into accountants 'down home'. I reckon they'd be more straight talking anyway ;)
 
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