Partnership and Accountants

[mdvn]

Hi,

I would like some feedback on the following please :

3 of us running individual LTDs are looking to partner up and we think the best model would be for each LTD to have equal share on a new company based on the fact that dividends could be transferred to our individual LTDs at any time without aligning our personal finances, we have also heard of the alphabet sharing structure model which might be convenient.

Our operation model would mainly consist of each partner getting rewarded separately for the amount of time spent individually on projects (similar to the "traditional" contractor model I guess with timesheets etc) with profit from everything else such as sub-contracting to be split equally between the 3 of us.

Are there any users here who have done the same and would like to share their preferred model or their experiences please?

I have discussed with my accountant who was very helpful with queries but couldn't pick up our new company structure and suggested to discuss with a specialist, as we are not aware of anyone are there any accountants here willing to discuss further perhaps?

Many thanks in advance for your comments.

[Lance]

read this

https://www.contractoruk.com/managed_service_companies

[Maslins]

It's something people discuss quite often, and where we've seen them put it into practice, it normally ends in tears.

[tarbera]

it normally ends in tears.

, it normally ends in tears.

this !!!

Even worse with family members involved

[northernladuk]

this !!!

Even worse with family members involved

or friends.

[TheCyclingProgrammer]

I could be wrong, but if YourCo is the shareholder in the new partner business, wouldn't any dividends paid from Company A to Company B be subject to corporation tax like any other profits? Ltd companies don't get a dividend allowance or pay income tax rates.

Wouldn't it be easier for you to just use the joint company for billing of joint projects and then each of you have your own company invoice that company for your services?

[Maslins]

I could be wrong, but if YourCo is the shareholder in the new partner business, wouldn't any dividends paid from Company A to Company B be subject to corporation tax like any other profits? Ltd companies don't get a dividend allowance or pay income tax rates.

Wouldn't it be easier for you to just use the joint company for billing of joint projects and then each of you have your own company invoice that company for your services?

If a UK company receives dividends from another UK company, it should count as "franked investment income", which is basically tax free.

Where we have seen people do this kind of thing, generally they'll invoice for their share of the profits, leaving a small buffer in the headline company for admin costs etc (ie main company A invoices end client £110k, individual companies B & C each invoice A £50k). This way it enables you to differentiate who gets how much without the need for alphabet shares (if everyone agrees company B deserved a higher % of the profits/whatever), and like the OP suggests, each individual is then in charge of what they want to do personal tax-wise.

The reason these things tend to turn sour isn't to my mind a tax one, it's down to multiple people working together, with different work ethics/attitudes/goals.

[ladymuck]

The reason these things tend to turn sour isn't to my mind a tax one, it's down to multiple people working together, with different work ethics/attitudes/goals.

Absolutely ditto this

[mdvn]

Hi all,

Thanks for your replies.

On the business/relationships side I understand why this could potentially be a recipe for disaster with the potential issues mentioned hence why we are looking to agree beforehand a tight shareholders agreement mainly around the areas of splitting profits/effort put into the company/exit strategy.

On the accounting/legal side I am not sure how the MSC legislation would be applicable to us, probably I don't understand the legislation very well but it looks to me as a vehicle to avoid tax by using a separate service provider as owner whereas the contractors are the shareholders, in this instance the suggestion is for our 3 companies to be the owners of the new company and we wouldn't have a service provider.

Our aim is to create a small consulting company which would take projects from clients, some of the work would be carried by us and some would need to be outsourced to other companies, same as with any other consulting company I guess, based on that what would be the best structure without falling foul of any legislation?

What Maslins suggests as franked investment income is what we had in mind with company A billing the client and then the 3 individual companies billing A for the amount of work done from each respective company, any additional profits from company A which will primarily be from outsourcing work would be split equally via dividends to the 3 companies.

Maslins, would your accountancy firm be able to support that kind of model/structure? If yes, perhaps I could discuss with my partners and contact you directly.

Many thanks

[northernladuk]

I'm sure many of these situations that failed also had tight agreements about everything. Doesn't mean much when everything goes south and people fall out big time. You appear to be going in with your eyes at least half open and are aware which is better then most.