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Startup formation in the UK?

I have gathered together financing from family for my startup, most of the funding is to allow me to pay myself during the initial phase until revenue is generated. As a business consultancy service provider there is very little cost to startup so the company account could be left fairly empty to start with.

Is it best to lodge this in the company account or to keep it separate so I don't need to pay myself and incur tax etc?

I would really appreciate your thoughts on this.

Iain

5 Replies

Ross Meador
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Ross Meador Advisor
Business Attorney Specializing in Corporate Law, Contracts, Securities, IP Protection and Licensing
Because you are apparently referring to a UK entity and I am a California lawyer, I don't know the answer to your question. But generally (and with caveats too numerous to mention here) consider the following general principles: If your investors are contributing equity, they will be owners of the company and the company will not have to pay them back. If they have loaned money to the company, the company will be obligated to pay them back, but they will not be owners of the company (unless the notes are convertible). In either case, the company should not have to pay income tax on the receipt of the investment. If the company uses that money to pay you a salary, you will be liable for personal income tax on that salary. If instead the money is given directly to you by the investors, you may or may not be liable for tax on that income, depending on the characterization of the funds (loan, gift, compensation?) and the UK gifting rules. In any case, the company would not be directly impacted. There are so many variables here; you really need to speak face-to-face with a UK tax advisor.
Bhakti Soneji
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Bhakti Soneji Advisor
Principal at Bhakti Soneji Tax Services
Iain,

Here's some info from a tax perspective: The answer would depend on the legal status of your consultancy service - whether it is a corporation or sole proprietor. In the UK, the corporate tax rate is lower than the personal tax rate. All salary/wage payments made from the corporation are deductible at the corporation level and taxable at the individual level. You will have to file 2 tax returns and report a loss at the corporation for wages/salaries and costs of running the business. And file an individual/personal tax return showing your wages. Your personal tax return will trigger taxes. Whereas, the losses generated at the corporation will have to be carried forward till the time the corporation generates revenue/income.
Therefore, if your consultancy is a corporation, I suggest you take out only minimum amount of cash as salary to keep the tax impact low.

Whereas, if your consultancy is a sole proprietorship, then, most likely, both the consultancy financials and personal income will be reported on your personal/individual tax return. Since you don't have any revenues you will report net loss due to the minimal costs of running the business. Which means, no tax impact.Therefore, you can go ahead and pay yourself what seems market rate.

Please note that I am located in the US and not a UK tax expert.

Also, the situation can be different with partnership/LLC type of legal entity set-up of your consultancy service.

Hope this helps.

Bhakti

Mary Matthews
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Mary Matthews Entrepreneur
Founder at Memrica, Health Tech Innovator, Speaker, Supporter of Women in Tech and Tech for Good
Bhakti and Ross make great points. If the money is a gift, my understanding is that this can be used at your own discretion, with no tax due, although there would be inheritance tax liability for the giftor's estate if they die within 7 years of making it.
Peter Johnston
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Peter Johnston Advisor
Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.
Consider your future financing requirements. If you go to a VC or accelerator, they will want to see that the money was put in and how it was used. If it appears that it has been shifted about, they will lose trust in you.

That could be more important than a little tax. In your first year you are unlikely to make a profit anyway, so tax liability should be small or non-existent.
Iain Hamilton
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Iain Hamilton Advisor
Founder of People Traction - Creating and delivering sustainable recruitment strategies to companies throughout the UK
Thanks for the advice folks and good point Peter. Im meeting an accountant tomorrow so that should help.
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