The drawing of wealth by both directors and shareholders is of key importance. After all, few would go into business in any capacity without an expectation of being paid for their troubles.

However, there are several points to consider when deciding how to provide remuneration, for both directors and shareholders. These focus on tax considerations, as well as protecting directors and shareholders and the company in the event of the cessation of trade, particularly if this is due to an insolvency event.

Directors’ salaries and service level agreements

In small or medium sized companies, directors and shareholders are often the same people. They are therefore likely to invoke a mix of methods of drawing money from the company, by way of salaries for directors, and dividends for shareholders, and a mix of both for owner/directors. There are other matters to consider too, such as expenses and benefits etc.

Directors who are not shareholders will inevitably be employees of the company and will need to take their remuneration as salary. In this case it is advisable for a service level agreement to be drafted between the director and the company, so that all parties are clear on the parameters of the director’s role within the company. The service level agreement can be as detailed as necessary but should at the very least cover expectations in terms of salary and benefits.

Directors who are also business owners would also benefit from an SLA for the same reasons, so that pay and benefits are clearly defined, as well as the role they are expected to perform.

Directors loan accounts

However, directors will often take money from the company during the course of the year by way of a director’s loan account, which they later reconcile through the accounts and the tax system at the end of the year. For more information see:

Dividends

A dividend is a payment made by a company to shareholders as a return on their investment. It can only be declared to shareholders if that company has made a profit after payment of corporation tax.

Because of the frequent cross over between directors and shareholders, often directors are remunerated via declared dividends at the end of the year, rather than being paid a salary.

The payment of dividends by way of remuneration needs to be carefully managed by the company and the director so that they do not fall foul of tax avoidance legislation, and so that directors are adequately covered should the company enter insolvency before a dividend is paid. For full details of this see:

For shareholders, their drawings will depend on the amount invested, the amount of shares that they hold, and the class of those shares. There are various different ways in which shares can be held in the company, usually dependent on the type of company and the type of shareholding associated with the company.

Expenses

In most companies, there will be a need for directors and employees (and sometimes shareholders) to be paid for expenses that are incurred in running the company.

This is normal, and expenses can often be applied against corporation tax to reduce taxation at the end of the year. However, it is important that expenses are dealt with directly within the company’s books and records, not only in order to meet tax obligations, but good records are essential if a company enters insolvency in order to protect those payments being attacked by a later administrator or liquidator.

Connected companies

When a director is a director of one or more companies, then they will need to be mindful of their duties over all companies of which they are directors, and be particularly careful to ensure that conflicts don’t arise, or if they do, that they are correctly dealt with.

At Francis Wilks & Jones we have many years of experience advising directors and business owners on the best way to draw wealth from their business interests, while protecting their personal interests, to avoid future personal financial liability or any accusations of misconduct. Contact us for a chat to see where we can help you. The most common areas for you to be concerned with are likely to be the following:


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