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Thread: Investment agreement with director

  1. #1
    just me duncan drennan's Avatar
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    Investment agreement with director

    I was considering setting up a loan/investment between myself and my company. The idea would be to put funds that are either earmarked for certain things (such as tax and VAT) into an interest bearing investment.

    Obviously I could go and setup a fixed deposit, or call account (and so on), but it would seem like a better idea to set up an agreement with myself (a director) and then put the money into my bond, and pay interest to the company. Seems like a win-win situation....emphasis on seems.

    I'll have to pay tax on the money earned from having the funds in my bond, but that would be offset against the interest paid, and possibly against the interest on the bond amount.

    Any issues with doing that (both ethically and legally)? Anything that I need to watch out for?
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    Site Caretaker Dave A's Avatar
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    About the only tip off the top of my head is try not to owe the company on a loan account at end of financial year.

    Of course, the beauty of putting it in a bond account is that you are reducing your interest bill, which in effect is "earning" you interest at a higher rate than you could in a savings, money market or notice account and SARS doesn't tax you on the savings.
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    just me duncan drennan's Avatar
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    Quote Originally Posted by Dave A View Post
    About the only tip off the top of my head is try not to owe the company on a loan account at end of financial year.
    Why would that be? Tax implications?
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    Site Caretaker Dave A's Avatar
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    Mainly because it's what the auditors look at most when it comes to loan accounts. If it bounces around some during the financial year that's not much of an issue. If you owe the company on the financial reports, they're going to insist on an interest charge.

    There are other issues, the big one being if the company is technically insolvent (ask Ms. Boloyi ). You also want to protect the nett current asset situation on your financial reports. They are only a snapshot really, but it's a snapshot with clout.
    The trouble with opportunity is it normally comes dressed up as work.

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    just me duncan drennan's Avatar
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    What is the definition for technically insolvent? Nett assets < nett liabilities?

    From a bookkeeping point of view, it would be nicer to have it classed as a current asset—a short term investment—than part of my directors loan account. It means that I can separate what the company owes me each month (for things that I pay for directly) and what the investment portion is. I could set up a formal agreement and pay interest (say 6% on the money invested). Then both parties win.
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    Site Caretaker Dave A's Avatar
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    It's a transaction with a connected party. A director of the company no less.

    Ultimately, as long as you are the only shareholder there isn't too much to be concerned about. When there are shareholders that are not directors these sorts of arrangements are closely analyzed and supposed to be reported in great detail.
    The trouble with opportunity is it normally comes dressed up as work.

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    just me duncan drennan's Avatar
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    Quote Originally Posted by Dave A View Post
    It's a transaction with a connected party. A director of the company no less.
    Yes, this is the thing, and the main reason I asked a bit about this - I don't really know what the "rules" and guidelines are for connected parties.

    Quote Originally Posted by Dave A View Post
    Ultimately, as long as you are the only shareholder there isn't too much to be concerned about. When there are shareholders that are not directors these sorts of arrangements are closely analyzed and supposed to be reported in great detail.
    Shares are held by a trust, so technically I'm just a director. I like to try and think of any thing that I do in the context of a big business, i.e. one with many shareholders and so on, so to me I should have reporting that is just as good (or maybe rather at a suitable level for the company size).
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by dsd View Post
    Yes, this is the thing, and the main reason I asked a bit about this - I don't really know what the "rules" and guidelines are for connected parties.
    The main thrust is that transactions with connected parties have to be reported to the shareholders. I can't speak to the level of detail, though. No experience in that area. Hopefully somebody else can add on that. Graeme or Marq?

    Just some thoughts:
    Perhaps a letter to the trust as sole shareholder notifying them of an agreement between you as director and the company, or
    Minute that the details of the loan agreement were reported at the AGM of the company.

    Just how valid any of these thoughts are I have no idea.
    The trouble with opportunity is it normally comes dressed up as work.

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