Now that your company is set up there are various aspects of being a shareholder to consider. This chapter deals with the more important of those aspects and in particular:

Paying Yourself

One of the first things that anyone starting a company wants to know is how do they get payment out of the business for their own labours.

If you are a sole trader or are in partnership you can in theory just take the money when you want to. This is commonly known as drawings as you are drawing out money on account of profits that you hope will be made. The tax on these ‘earnings’ is paid later when the profit figures are known.

In a company things are different. As the company is a separate entity it has to pay you either:

• as an employee by means of a wage, a salary or by commission, or
• as a shareholder by way of dividend.

 

Let us consider the implications of each of these in turn.

Payment By Wage, Salary Or Commission

A company is required to pay all employees, and that includes directors and the company secretary, assuming they are paid at all, under the PA YE system so that tax is deducted directly at the time of payment. Paying your taxes is discussed further in Chapter 10 but suffice to say if you intend to pay yourself from your company you will have to do it in accordance with the rules that apply to all employees.

You will therefore have to decide how much money your company can afford to pay you and treat that as a wage or salary on a regular basis. Subsequently, you may find that you are taking too much which either starves the company of cash resources needed for the business or means that the company is just not making enough profit. You will then have to waive your salary for a while till business picks up. What you must not do, in these circumstances, is just draw money out as you would as a sole trader or partnership. The reason for this is simple. The company is a separate entity so if you just draw money out the company is, in effect, lending you money.

and

This may seem harsh because there is a tendency to think of the money in your company as your own but it is not. It belongs to the company. And the company, like people, has to pay its tax. It is known as corporation tax and the rate is fixed each year by the Government in the Budget proposals. For small companies it is normally a similar rate to the standard rate of income tax. From July 1999 companies are required to assess their own profits on a similar system to the rules applying to income tax.

Case Study: Hannah And Usha Decide On Equal Salaries

Hannah and Usha have decided to pay themselves a small salary whilst the business builds up. They contact the Inland Revenue to ask what they should do and receive in return a package of information described as a New Employers Starter Pack. This contains all the forms and instructions for taxing wages and salaries under the PAYE system and accounting for their national insurance contributions. As they only want to pay themselves as directors and have no other employees they read the information carefully to see what is required. They realise their tax has to be paid each month.

Payment By Dividend

The profits of a company can be distributed to the shareholders by way of dividend. This means the company decides to pay out so much per share and all shareholders will participate. This may prove difficult if all you are trying to do is pay yourself.