As a part of the company formation process, you need to decide who will be a director and shareholder in your limited company.
To make that decision you need to be aware that there are certain responsibilities and requirements for each role. A limited company needs only one director: you as the freelancer or contractor, but you have the option to appoint further directors.
Directors’ responsibilities
The responsibilities and duties of a director are set out in the Companies Act 2006. They aim to ensure that directors act in the best interests of their companies (not their own) and in accordance with company law and regulations. The main areas of responsibility are listed below, but it is important that you understand all of your responsibilities in detail before becoming a director. Company directors should:
- act in the best interests of the company
- act within the company’s powers as set out within the articles of association
- act with reasonable care, due diligence and skill
- declare interests in a proposed transaction of arrangement with the company
- declare any conflicts of interest
- ensure all statutory returns are filed for the company on time and are accurate
- ensure that the correct amounts of taxes and National Insurance are paid
- ensure that the company operates within company law
Utilising professional advisers and service providers such as legal advisers, accountants and IFAs will help to ensure that you fulfil your duties as a director, but it is important to understand that you are responsible for the duties set out in the Companies Act and any relevant legislation. You are liable for any errors that may arise. That is why it is so important to make certain that any advisers and service providers you use are professional, qualified and reliable.
For a complete list of duties and responsibilities, visit http://www.companieshouse.gov.uk.
Who should I appoint as director of my contracting company?
If you’re setting up a company as a vehicle to pay yourself in the most tax-efficient way, then it is probable that you’ll only need to appoint yourself as a director. If you are looking to appoint more than one director, each individual needs to be aware of the legal obligations of being a director. It is worth noting that you don’t need to be a director to hold shares in the company and therefore take a share of the profits.
What are shares?
Shares are used to apportion ownership of the company. Ownership of shares in a company usually affords the shareholder voting rights and therefore influence over the running of the company. Shares are also used in the distribution of profit from the company; shareholders are paid dividends based on the number of shares they hold. It is a key part of ensuring your business is as tax-efficient as possible so it is important to make sure that the distribution of company shares works for you.
What is a shareholder?
Simply put, a shareholder is someone who owns shares in a company. The majority of contractors and freelancers are the sole shareholders within the business, but there is a fair proportion that utilise shares to ‘pay’ other individuals linked with the company in a tax-efficient way. This is a technique used to share dividend income with a spouse, for example, and can maximise unused personal tax allowances.
Who can be a shareholder of my contracting or consulting company?
Shareholders should be either a spouse, a civil partner, or anyone who actively works in the business. Shareholders usually have voting rights and therefore some control over how the business is run, as well as having rights to a share of the profits (distributed as dividends). The proportion of shares an individual owns determines their proportion of the profits.
Distributing shares
Best practice is to distribute shares in accordance with the individuals’ role within the company. You can hold the majority of the shares as the director, and then distribute shares to other individuals who are actively working in your business. This then enables you to distribute dividends to all shareholders in accordance with their share allocation.
Things to note when allocating shares:
- Ordinary shares can be allocated to spouses so that they qualify for the spouse’s exemption under Section 624.
- Dividends paid to the spouse must be income for them to spend as they wish – you can’t ‘reroute’ the payment back to yourself as the main shareholder.
- Keep a solid audit trail: document all share transfers and dividend payments through transfer forms and the required board minutes and vouchers when dividends are paid. This is crucial to ensure that should HMRC ask, a full record can be provided.
- Record shareholder involvement in the business: you should keep timesheets and details of the work carried out by the shareholders in the business – especially important for spouses.
- Approach dividend waivers with extreme caution. Waivers allow a shareholder to waive their right to a dividend payment. Some shareholders use this to enable the dividend amount to remain in the business (investment), but waivers can also be seen as tax avoidance when the waiver allows profits to be diverted to lower-tax attracting shareholders.
Company secretaries for contractors and consultants
Private companies and small businesses are no longer required to appoint a separate company secretary. A company secretary is the chief administrative officer for a company and they share responsibility for certain tasks detailed in the Companies Act. Both directors and company secretaries can be prosecuted in they fail in their duties of office under the Companies Act.
