Employee Vs Shareholder

[Brahan]

The company I work at consists of my boss and I. That's it, everyone else has left because we've really been through the mill over the last 18 months but I've stuck it out because I believe in the company and we're good at what we do, even though I didn't get a payrise in 2009.

I'm discussing my package at the moment and I've been given the option of shares which allows me to take dividends. I'm not 100% sure, but I think he's angling for me to take a smaller increase of salary as well as shares, it's just the impression I get. I have a very steady working relationship with him but got the feeling there was a pitch somewhere along the line because I don't fully understand the implications of being paid in dividends.

Can someone please point out the pros and cons of being a shareholder being paid in dividends? Or where is the best place for me to search.

Ta.

 

[Globalti]

My colleagues and I have bought shares (at very favourable prices with BOGOF for some) in our company, which is successful and growing fast. The dividends are paid twice a year and are worth well over double what my investment would give me in a building society account. If we retire or leave we can sell the shares back to the holding company for a very attractive profit. This has a quite marked incentivising effect on all employees.

However I don't know how much of this would apply in your own situation. How will the shares be divided between you? There are ownership implications and he might be inviting you to become a part-owner in the company because he values you so much.

 

[snakehips]

A share is a share in the company. What is the company worth ? How do you value a company ? On its earnings ? Has it got any ? If the company is not worth much the shares aren't either. Let's say things get better , the company prospers , you want/need to sell your shares. Is there a market for your shares. Who would buy them off you ? Your boss ? He might not want to buy them off you at that time.
On the positive side if the company prospered and you could sell your shares some or all of the profit could be free of CGT.

Snake

My Library

 

[Brahan]

There are two types of shares, ordinary and preference.

Ordinary shares are exactly that, they are ordinary a dividend is paid out each year ( or not it is upto the directors of the company).

Then you have preference shares which enable you to take a fixed dividend each year regardless of what is happening to the company.

The problem in your case is that when a company goes into liquidation (which sounds iminent in your current situation) ordinary shareholders are further down the pecking order when it comes to receiving what is owed to them compared to that of those that own preference shares and debentures.

Sounds like your boss is trying to pull a fast one and paying you by dividends when he does not have to if the shares are ordinary. Personally I'd start looking for a new job.

I did paint quite a bad picture, but things have been on the turn of late...

We've actually gone over target for the last few months and things are beginning to look very good, we've signed a new 12 month lease and have committed to other long term outgoings. Me sticking it out has strengthened my position - I just don't know anything about being a shareholder and if I want to negotiate strongly I'd like to know more about what's involved.

 

[Coco]

On the positive side if the company prospered and you could sell your shares some or all of the profit could be free of CGT.

Snake

Don't the normal CGT rules apply to shares as well? Vaguely remember having to sell my companies shares across 2 years to avoid CGT.

 

[accountantpete]

It's quite a complicated area and depends on how many shares you are given as a percentage of the total issued share capital,but basically,dividends are taxed at 10% and any Corporation Tax paid by the Company is deemed to be also a payment of the basic rate tax (10%) on any dividends. So if you get a dividend of £1,000 net then on the tax return you will show gross dividends of £1,111,tax already paid £111 and net £1,000.

This is a lot more tax efficient than paying you £1111 in income.

The downside is that the amounts won't count in any future redundancy calculations and if there are no profits then declaring a dividend is also out.

 

[ASC1951]

Can someone please point out the pros and cons of being a shareholder being paid in dividends? Or where is the best place for me to search.

This can be a really complex area, with legal as well as financial implications. You would be foolish to base your decision on what you pick up here. Even those of us who have some professional knowledge of Close Company administration and taxation don't know anything about your own company or your finances.

If you want a practical suggestion, tell your boss that you need to discuss it with the company accountants and, if necessary, that you have independent legal and/or tax advice at the company's expense.

 

[RecordAceFromNew]

Can someone please point out the pros and cons of being a shareholder being paid in dividends? Or where is the best place for me to search.

Ta.

Dividends can only be paid from cumulated profit having deducted all taxes. Wages are costs, and are payable whether a company makes a profit or not.

If you are a shareholder holding X% of its shares, you have title to X% of the company's value. However, a small company's value is a very fickle thing, and is especially dependent on the actions and decisions of its majority shareholder (i.e. your boss in this case).

Please see

http://www.shareholderrights.co.uk/introduction_nf.htm

and associated pages as a first port of call (please note however these apply only if the business is trading through a limited company).

Although the company only has two workers (you and your boss), that it has not been doing too well recently, and even if he is not giving you a substantial percentage of the shareholding, "free" shares are still worth having because there can be potential upsides (IF you AND him steer the company into a booming future and the value of the company go up substantially) and little downsides, BUT the shares might be of limited current value, and are probably not worth giving up much, if anything, for.

If he is a genuine, nice guy, the gesture might be his way of showing his gratitude to you for having stuck with him through thick and thin, and to encourage you to continue to do so by aligning your interests more directly with his and the company's.

If on the other hand he expects you to give up something of value you weren't going to forgo otherwise, then you would be wise to look closer at what the company is really worth, and think twice before doing the deal.

 

[Over The Hill]

I dont know much on the subject but-

Only consider shares in lieu of pay if you were going to save up that pay somewhere anyway.

x% of nothing is nothing. If staff are leaving and the firm is on the slide, are you geting shares in a firm that is going under? If not that drastic, is it going to be worth less in the future? if so you shares drop in value too.

Hope you get it sorted

 

[Brains]

Having said which, if your boss is the next Bill Gates and the company is the next Microsoft then the option of getting 1% (or whatever he is offering) of the company could be a very good thing.

However you need to go in with your eyes open. Get professional advise

 

[Brahan]

Thank you for your input guys. I've been speaking to my boss today to make sure that I get a handle on things. I've told him that I'm going to need time to understand what's in it for me and he's cool with that, so the ball's in my court.

It's an exciting time for me and impulse (given the last quarter's figures) tells me to go for it, but I need to make sure I'm doing the right thing - it seems that I have a lot of homework to do.

 

[twentysix by twentyfive]

Thank you for your input guys. I've been speaking to my boss today to make sure that I get a handle on things. I've told him that I'm going to need time to understand what's in it for me and he's cool with that, so the ball's in my court.

It's an exciting time for me and impulse (given the last quarter's figures) tells me to go for it, but I need to make sure I'm doing the right thing - it seems that I have a lot of homework to do.

+1

Yup indeedy