Family business, tax liablities

[Sgt_Pepper]

Hi. Feel free to move this post to the relevant section if this is not.

I’ve posted here before and found the advice given useful and accurate.

I’m self employed (year two), and it’s going very well fortunately. My wife works about 30 hours a week in the public sector now.


My father started a small business about 4 years ago, and has asked my wife and I to get involved - we did so progressively over the course of the last year. However, by choice we took no payment from him as he told us he was going to hand the business to us in 5 years. We don’t doubt he will, he’s a straight up guy and man of his word.


Its current earnings are modest, about 40k this year, but pretty impressive when you consider it’s overheads are very low and the vast majority of the 40k is earned in July and August. It's stock-based, but hire.


We collectively agreed to change the name of the business last year, which we did, and I’m now doing a few days a week driving and delivering for the business. My wife created the new website from scratch, and my father’s going to train her in on the accounts and finances in the coming few years. So although we don’t get paid anything, we invest a lot of time in it. We felt that to give the business a chance to grow, it would be best not to take a penny out of it. As we don’t need the extra income coming into the house due to having our own jobs, this is perfectly fine with us and something we suggested, not my father. Nor does he take a wage out of it. It keeps whatever it earns net, and the money is reinvested annually in the form of new stock. I'd reckon it has about 60k of stock now.


However, none of the three of us have any idea how it would affect our revenue liabilities & responsibilities going forward if my wife and I were to put out names down as directors. A brief look online at a few articles in mainstream media about inheriting a family business seem complicated and carry a lot of warnings about unexpected tax bills.


My questions:


1) Would it be best to put our names down as directors now while the business is fledgling and not earning big money. In 5 years, it could be earning 3 times that - that worries me.


2) How will it affect us as far as tax assessment and legal responsibilities go?



Thanks in advance.

 

[newtothis]

If I were you, I'd:

- read up on companies, directorships and taxation

- once you've a basic understanding, consult an accountant for professional advice

As you’re talking about directorships, I assume it’s a limited company?

If so, there are (at least) three issues to consider in the questions you're asking, which are in general quite separate, though they do impinge on each other:

- ownership

- directorship

- employment

From some of the comments you’ve made, I think you may be confusing these with each other.

Ownership is established by how many shares there are in a company and how many of those shares you own. Whoever owns the majority of shares ultimately controls the company. Shareholders appoint directors to run the company on their behalf. Directors may or may not be shareholders themselves.

The advantage of being a director is that you get to run the company: see what’s going on and input to the company’s direction. The disadvantage are the obligations that come with it: if you don’t watch what you’re doing, you can end up as criminally liable.

Employees of the company get paid for their efforts. Employees may or may not be shareholders and they may or may not be directors. Employees who are both directors and significant shareholders are treated differently by Revenue.

At the moment, you seem to be working for nothing in a company you don’t own in return for no salary. Is this correct?

To answer your questions:

1. Would it be best to put our names down as directors? Firstly, directors are appointed by shareholders and/or the existing directors: you can’t just “put your name down”. To answer this, see the note above on the advantages and disadvantages. Personally, if I were putting significant effort and/or cash into a company, I’d look to be a director to be able to see what’s happening to that investment, but the obligations are significant.

2. How will it affect us as far as tax assessment and legal responsibilities go? This is a complex question and you need professional advice: as noted above how revenue treats your income from the company depends on whether you are a shareholder and/or a director. The legal responsibilities come with being a director.

I’d say by far the most important issue to straighten out as soon as possible is ownership. If the company is currently owned by someone else and they gift you partial or complete ownership when the value of the company is arguably worth €1,000, it is completely different from having it gifted (or inherited) when it is valued at €1,000,000. Again, you need professional advice on this. If you’re the one putting all the effort in, I’d suggest that you should be the owner (either complete or partial) sooner rather than later (i.e. transfer as soon as possible).

 

[mccoypat94]

If you are a company director but not a shareholder does that make a difference to how revenue view you for income tax purposes?

 

[aristotle]

however, by choice we took no payment from him as he told us he was going to hand the business to us in 5 years. We don’t doubt he will, he’s a straight up guy and man of his word.

Sometimes circumstances change, I have seen people become ill and need money for expensive treatments. Delicate situation with family but consider getting ownership sorted out earlier if you are working and taking no money out. Of course with it being you father you would help fund anything like that anyways no doubt.