Protecting the warchest

[georgeg]

Hello All,

I am looking at collaborating with a couple of friends, providing very similar services (but not exactly the same) to what I currently provide via my ltd company.

Is there a way to operate this "extra" line of work via my existing ltd, distribute the earnings to those that did the actual work (preferably via some type of dividend), while keeping my existing warchest protected?

I see this as an opportunity to enable growth of my ltd company without getting into hiring permanent employees in the short term. Hiring can happen later, if and when the volume of work increases further.


Regards,
George

P.S.: This is my first post, so, Hello everyone!

[JB3000]

Hello All,

I am looking at collaborating with a couple of friends, providing very similar services (but not exactly the same) to what I currently provide via my ltd company.

Is there a way to operate this "extra" line of work via my existing ltd, distribute the earnings to those that did the actual work (preferably via some type of dividend), while keeping my existing warchest protected?

I see this as an opportunity to enable growth of my ltd company without getting into hiring permanent employees in the short term. Hiring can happen later, if and when the volume of work increases further.


Regards,
George

P.S.: This is my first post, so, Hello everyone!

Could you bill the client and your friends bill you?

[northernladuk]

Am not sure what model you are going for but I'll assume you are a fairly new contractor and you've seen some role the client is filling and fancy a piece of it?

There are a number of challenges to consider before you get to the billing element. Firstly the idea of using friends. If it was a decent model you wouldn't need to narrow it to just friends. Doing business with friends rarely ends well, personally I'd consider getting the right people and leaving my friends out of it.

Other things are...
Clients have PSL's. You aren't going to get anyone in if there is an agent already in place and there is a PSL
Will your friends be available when you need them or do you expect them to sit on the bench until you get something?
Where do you make your money? Creaming a percentage off the rate? To not screw them you will be looking at a couple of 10's of pounds for which you have to deal with recruiting, onboarding, day to day issues and problems if they leave etc... when will you have time to do this if you should be working and for a few 10's a day it's not worth it.
and so on....

Even if you are looking to build up a small consultancy and offer all of you out as a package most of the above apply and much more on top.

I'd bet nearly every new contractor has thought about this and in a vast number of cases it just doesn't work.

[northernladuk]

And I don't understand the reference to the warchest. Running your accounts properly will do this? How do you expect this model to affect your warchest?

[Danglekt]

And I don't understand the reference to the warchest. Running your accounts properly will do this? How do you expect this model to affect your warchest?

I assume he is thinking about dividend distribution, and if his "warchest" (rainy day fund is a better phrase) could get raided to keep his mates afloat rather than protecting it so it would just be himself? I assume he is thinking of making them shareholders so they can get dividends, but only wants them to be able to access dividends from work untaken since they joined?

[Underbase]

I assume he is thinking about dividend distribution, and if his "warchest" (rainy day fund is a better phrase) could get raided to keep his mates afloat rather than protecting it so it would just be himself? I assume he is thinking of making them shareholders so they can get dividends, but only wants them to be able to access dividends from work untaken since they joined?

If this is the case, then isn't it a Managed Service Company, and there is legislation to specifically stop this being "tax efficient"

https://en.wikipedia.org/wiki/Managed_service_company

[northernladuk]

I assume he is thinking about dividend distribution, and if his "warchest" (rainy day fund is a better phrase) could get raided to keep his mates afloat rather than protecting it so it would just be himself? I assume he is thinking of making them shareholders so they can get dividends, but only wants them to be able to access dividends from work untaken since they joined?

Yikes.. I hope that isn't what he is thinking...

[Danglekt]

Yikes.. I hope that isn't what he is thinking...

I hope not too, but it is all I can assume he means after reading his questions

[WordIsBond]

Yikes.. I hope that isn't what he is thinking...

Pretty sure it is. That's why the protecting the warchest comes into it.

OP, yes, there's a way to do what you want.

1. Issue a new class of shares for each of your mates. Yours are A shares, mate 1 is B shares, mate 2 is C shares, etc.
2. Make sure that all shares but yours are non-voting, so you have control and can determine the dividends all by yourself. Maybe your mates are trusting enough to let you do this. Fools. But it is necessary, because if you give them votes / directorships, then they can rip off your warchest. So you have to maintain complete control.
3. Pay out dividends for each class of shares by how much each guy brings in. Mate #1 brings in £60K, takes £10K salary, you pay £10K corporation tax on the profit, and disburse the next £40K in Class B dividends (all his, but maybe he will give some of his shares to his girlfriend and minor children, just to increase the legal excitement to come).
4. Pay out dividends from your earnings and your warchest for the A shares.

This works perfectly. The only problem is that you need to set aside a massive amount of money for legal expenses, back taxes due, penalties and interest, and maybe even enough to support your family, if you have one, while you are in prison. They probably wouldn't send you to prison if you paid them everything they wanted, but who knows? Tax evasion isn't very popular these days.

[georgeg]

Hi all,

Thanks for the swift responses!

Just a couple of clarificatiions.

My objective is not to bring a few more heads in an existing client etc etc.

My first objective is to create something like a virtual team that will build a product,. That virtual team will eventually become an independent ltd, if and when the product takes off.

Northernladuk got it spot on, but common wisdom suggests that I should steer away from such an idea, as it cam get complex, and with potentialy higher liabilities.

The reason of starting this via my ltd is to allow reuse of infrastructure / resource.

Having that in mind, how would you guys approach this?

Regards,
George