Commentary

D6.650 Profit extraction from family companies—other issues

Corporate tax
Corporate tax | Commentary

D6.650 Profit extraction from family companies—other issues

Corporate tax | Commentary

D6.650 Profit extraction from family companies—other issues

It is necessary not only to make straight arithmetical comparisons, but also to take account of a number of other factors in deciding whether to pay (additional) salary or declare a dividend. Set out below are a number of particular issues that should be considered.

Direction

The question arises: who are the business proprietors? When this commentary examined the issue of salary versus dividend (see D6.642), it assumed a straight comparison between a sole trader (or, perhaps, a husband and wife, or civil partners, partnership) with a small company owned entirely by the same individual (or married couple or civil partners). Things might not be that straightforward. As a business grows, diversifies or passes through the generations, the shareholdings become more widespread.

Such a development can present a problem. A bonus is very specific and can be directed to reward particular individuals. A dividend is declared and paid to all shareholders. This may not matter where the shares are very closely held (say, by husband and wife or civil partners). However, with more diverse holdings, it may mean that dividends are directed to passive investors who contribute little to the success of the company. Possible solutions to this include more complex share structures which

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