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New Enterprise Question
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I am setting up a new company which wont have any significant income for the first year. My question is how do i get paid for my time eventually. I dont mean I want money now - I can wait. I want to know how to record the time I spend to make sure i get paid when the company does have the money.
Not sure its important but I will be the Main shareholder and there wont be a big cash input - wont it look like the company is trading insolvently?
Not sure its important but I will be the Main shareholder and there wont be a big cash input - wont it look like the company is trading insolvently?
Answers
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Congratulations - and good luck.
I did that about 5 years ago and we're doing well.
Owning a company is not like being employed. You have a number of ways of taking money out of the company .
You can take that as being a compensation for your time, or as a reward for having the insight to set up a successful venture.
The first way is to pay yourself a salary. That could mean employing an accountant or book keeper to do the payroll stuff (We pay an accountant). They will handle things like weekly or monthly salary payments from the company to your personal account as well as NI, pension contributions and so on.
The second way is to for the company to declare a dividend, that goes to the main shareholder (you).
Once the company is making good money, you can balance these two for maximum tax efficiency.
The recommended route for tax-efficiency is to take a minimum salary (around GBP11k/year), which should be under either the NI threshhold, or the tax threshhold, depending on your personal circumstances, and the rest to be paid as a dividend.
As a personal taxpayer, you can take the first GBP5k tax-free and the rest is taxed at 7.5%. Remember, however, that the company also pays corporation tax on any declared dividends, so it works out cheaper, but not much, than paying yourself a salary.
In the first year, the company can trade at a loss. The company can declare a dividend, but as the main shareholder, you can choose to leave that on account within the company, using a directors' account, where either the company owes you money, or the other way around.
A company is only insolvent if the creditors (that may well be you), demands everything they are owed, and the company cannot afford to pay. If you as an individual, allow the company to operate at a loss for a year or two, using your own money to fund the deficit, then it is trading at a loss, but it is not insolvent.
Hope it helps - and good luck with the ride It's hard work, but very rewarding :)
I did that about 5 years ago and we're doing well.
Owning a company is not like being employed. You have a number of ways of taking money out of the company .
You can take that as being a compensation for your time, or as a reward for having the insight to set up a successful venture.
The first way is to pay yourself a salary. That could mean employing an accountant or book keeper to do the payroll stuff (We pay an accountant). They will handle things like weekly or monthly salary payments from the company to your personal account as well as NI, pension contributions and so on.
The second way is to for the company to declare a dividend, that goes to the main shareholder (you).
Once the company is making good money, you can balance these two for maximum tax efficiency.
The recommended route for tax-efficiency is to take a minimum salary (around GBP11k/year), which should be under either the NI threshhold, or the tax threshhold, depending on your personal circumstances, and the rest to be paid as a dividend.
As a personal taxpayer, you can take the first GBP5k tax-free and the rest is taxed at 7.5%. Remember, however, that the company also pays corporation tax on any declared dividends, so it works out cheaper, but not much, than paying yourself a salary.
In the first year, the company can trade at a loss. The company can declare a dividend, but as the main shareholder, you can choose to leave that on account within the company, using a directors' account, where either the company owes you money, or the other way around.
A company is only insolvent if the creditors (that may well be you), demands everything they are owed, and the company cannot afford to pay. If you as an individual, allow the company to operate at a loss for a year or two, using your own money to fund the deficit, then it is trading at a loss, but it is not insolvent.
Hope it helps - and good luck with the ride It's hard work, but very rewarding :)
Sorry - should have said it depends a bit on the legal status of the company.
Is it limited liability
Or are you a sole trader in the eye of HMRC,
Or something else.
Probably the first question is to decide on what kind of company you want.
We set up a limited liability company through our accountant, and then registered for VAT etc.
You can approach it in many different ways.
I think the government has lots of advice, but we got advice from an accountant friend and othe friends who have done similar.
If you have specific questions, I have some experience that may be of help.
Is it limited liability
Or are you a sole trader in the eye of HMRC,
Or something else.
Probably the first question is to decide on what kind of company you want.
We set up a limited liability company through our accountant, and then registered for VAT etc.
You can approach it in many different ways.
I think the government has lots of advice, but we got advice from an accountant friend and othe friends who have done similar.
If you have specific questions, I have some experience that may be of help.
Thanks Kidas
I am already a sole trader (30 years) and own a software business which gives me an income from licence and support fees - I should have converted to a limited company years ago but was never quite sure how to transfer the actual software intellectual property to a limited company and how to value it efficiently.
This new venture is software too but will be an online based software which will be paid for monthly as is the current norm. This time i intend to set the company up first but i will then need to write the software(or get it written) and charge to the company so that i get paid eventually for it.
I am already a sole trader (30 years) and own a software business which gives me an income from licence and support fees - I should have converted to a limited company years ago but was never quite sure how to transfer the actual software intellectual property to a limited company and how to value it efficiently.
This new venture is software too but will be an online based software which will be paid for monthly as is the current norm. This time i intend to set the company up first but i will then need to write the software(or get it written) and charge to the company so that i get paid eventually for it.
Reckon you can do that in any number of ways, though it might be best to get professional advice.
Of the top of my head, the company can engage an individual freelance consultant (you) to create the required software. In your capacity as sole trader, you can charge the new company an appropriate rate, and that rate goes on the company books as a liability. When the company has enough income/funds, it can pay off the liability to its freelance consultant.
You can create a simple contract that assigns the IP in the software to the sole trader freelance, or the company, as you think appropriate.
Or you can write the software in your guise as sole trader, and sell a licence to the company to use said software.
A third approach would be to employ yourself as a company director, and you contribute your time, but on credit, so that the company pays a notional amount into a director's account. When the company has sufficient funds, the company can deliver the appropriate amount with interest to the director's account, and you (as an individual) can withdraw it for your own use.
And so on...
Of the top of my head, the company can engage an individual freelance consultant (you) to create the required software. In your capacity as sole trader, you can charge the new company an appropriate rate, and that rate goes on the company books as a liability. When the company has enough income/funds, it can pay off the liability to its freelance consultant.
You can create a simple contract that assigns the IP in the software to the sole trader freelance, or the company, as you think appropriate.
Or you can write the software in your guise as sole trader, and sell a licence to the company to use said software.
A third approach would be to employ yourself as a company director, and you contribute your time, but on credit, so that the company pays a notional amount into a director's account. When the company has sufficient funds, the company can deliver the appropriate amount with interest to the director's account, and you (as an individual) can withdraw it for your own use.
And so on...
Thanks for your time Kidas in answering this one.
One think on my mind is that I will want to be selling this company on after 5'ish years.
I sort of want it to be 'tidy' when its sold - ie I dont want to personally be the owner of the IP and have to transfer it with the sale - therefore the value of writing it will have to be quite high at the beginning and be paid off and 'tidy' by the time the 5'ish years is up.
I like the idea of being employed as a freelancer to write the software but if I am the main shareholder - doesnt that look a bit 'fishy' if i agreed between myself about the price? I mean I could agree the value at £1million if i wanted and get that paid back before the company got sold - the value of the company would be its current customers and income as long as that figure want still outstanding.
This was one of my original dilemmas about valuing the current companies IP.
One think on my mind is that I will want to be selling this company on after 5'ish years.
I sort of want it to be 'tidy' when its sold - ie I dont want to personally be the owner of the IP and have to transfer it with the sale - therefore the value of writing it will have to be quite high at the beginning and be paid off and 'tidy' by the time the 5'ish years is up.
I like the idea of being employed as a freelancer to write the software but if I am the main shareholder - doesnt that look a bit 'fishy' if i agreed between myself about the price? I mean I could agree the value at £1million if i wanted and get that paid back before the company got sold - the value of the company would be its current customers and income as long as that figure want still outstanding.
This was one of my original dilemmas about valuing the current companies IP.
Does it look 'fishy'
Perhaps.
But there is a big difference between "looking a bit dodgy" and being on the right side of the law.
Amazon, Starbucks and others base themselves in low-tax jurisdictions and charge their respective international subsidiaries large sums to licence the brand name, meaning that the international subsidiaries operate at a loss, or zero profit, meaning no tax to pay. IN effect, they are moving the profit from the location of doing business, to the tax-haven.
It looks highly dodgy, but enables them to say, truthfully, they comply with all laws in the jurisdictions in which they do business.
My best advice is to suggest you talk to an accountant who will know what the Tax authorities will allow you to get away with and what might trigger them to take an interest in your business.
In the early years we paid our accountants only a couple of £100/year. As we have grown, that bill has gone up, but they save us more than their fee each year in suggesting various ways to help the business and keep us tax-efficient both for the business and for our personal affairs.
Ask around among your friends and find a friendly accountant.
You should be able to get going with the first year's fees all paid for well under £1000. Less if you take on some of the work yourself.
Perhaps.
But there is a big difference between "looking a bit dodgy" and being on the right side of the law.
Amazon, Starbucks and others base themselves in low-tax jurisdictions and charge their respective international subsidiaries large sums to licence the brand name, meaning that the international subsidiaries operate at a loss, or zero profit, meaning no tax to pay. IN effect, they are moving the profit from the location of doing business, to the tax-haven.
It looks highly dodgy, but enables them to say, truthfully, they comply with all laws in the jurisdictions in which they do business.
My best advice is to suggest you talk to an accountant who will know what the Tax authorities will allow you to get away with and what might trigger them to take an interest in your business.
In the early years we paid our accountants only a couple of £100/year. As we have grown, that bill has gone up, but they save us more than their fee each year in suggesting various ways to help the business and keep us tax-efficient both for the business and for our personal affairs.
Ask around among your friends and find a friendly accountant.
You should be able to get going with the first year's fees all paid for well under £1000. Less if you take on some of the work yourself.
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