Executive summary – basic concepts in managing a limited liability company
introduction:
There are a number of basic concepts that every self-employed person who aspires to establish a company must know, in this article we will briefly review a number of basic concepts that will help you “get down to business” in everything related to managing and establishing a company.
share
Share – an investment unit that gives its holder various rights, for example:
- The right to withdraw dividends, which are actually the company’s profits.
- The right to vote and influence the company’s decisions, for example expansion, merger, etc.
- The right to receive a return on the investment during the liquidation of the company.
- Any right defined in the company’s articles of association.
There are many types of shares, including: “preferred shares”, “participating preferred shares”, “accumulating shares” and many more.
In light of this, it is not a “closed list” of rights or types of shares,
And each company has the possibility to individually define additional rights and shares in the “Company Articles of Association”.
Share capital
It is important to know that the concept of “share capital” has several “hats” that you need to know:
- “Registered share capital” – the number of shares / investment units existing in the company,
For example: 100,000 shares, where the monetary value of each share is defined in the company’s articles of association.
When in principle it is about a potential number of shares that will go on sale in the future. - “Issued share capital” – the number of shares that were actually offered for sale, so there may be a situation where the “registered share capital” will be 100,000 but the issued share capital will be only 100 shares.
- “Paid-up share capital” – the number of shares actually purchased and paid for to the company.
In fact, it is about funds that were poured into the company by the shareholders, as an investment and now belong to the company only.
This is the place to point out that investing in this way is bad in terms of tax planning because the shareholders will only be able to see their money again when the company is liquidated, when like the other assets that will be in the company, they will have to pay tax at a rate of over 40%.
Usually, investing in this channel is more of a declaration of intent by the owner and the invested money takes the form of “seriousness fees” from the point of view of the shareholders, which result in higher trust on the part of the potential investors, banks, etc.
The more correct way is to invest funds in the form of an “owner loan” which we will detail later.
Terms company
One of the cardinal documents in the company is the “Company Articles of Association”.
The company’s articles of association – a policy letter that outlines a line of activity and clearly defines and regulates the most important issues in the company’s activity:
- The goals of the company – usually to engage in any legal occupation.
- Limiting the liability of the shareholders for the company’s debts for the issued share capital, or in other words a limited liability company – Ltd.
- Distribution of profits and characterization of shares.
- What is the value of each share.
- Ways of management and decision-making and more..
Founders agreement
When it comes to a company consisting of several partners, it is also important to make a “founders’ agreement” which regulates the relationship between the shareholders, and in this agreement it is useful to specify:
- A dissolution and separation mechanism that will not collapse the entire company.
- Defining powers, appointing managers and officials in the company
- Confidentiality and non-competition agreements between the partners
- Financing and raising capital
- Rights and obligations of each of the partners and more.
Authorized signatory in the company
In contrast to a self-employed person whose signature binds him personally, in a company, which is a separate legal entity, it is necessary to determine who the person or persons are authorized and able to represent the company and bind it in various matters such as: price offers, contracts with customers and suppliers, dealings with banks and tax authorities, etc. B.
In order to determine the person who will be the authorized signatory, a meeting of shareholders or the board of directors must be scheduled, and decide who will be the authorized signatory.
This is the place to point out that the companies law requires every company to hold a shareholder meeting at least once a year, where every decision that is made must be documented and supported by minutes.
Withdrawal of shareholder profits
The company is a separate legal entity from the shareholders, therefore its conduct and financial accounting is completely different from that of an independent business owner.
For example: a self-employed person withdraws his profits without requesting special permission from anyone, and this is because all his profits belong directly to him, but in a company withdrawing funds requires reporting and obtaining permission from the shareholders or the board of directors and we will explain.
A shareholder can withdraw money from the company in one of the following ways:
- Salary – It is desirable that the salary be equal to the shareholder’s household expenses, and that it be paid at regular intervals.
- Owner loan – the shareholder may withdraw large sums of money from the company he manages, but it is very important that the loan does not have the smell of an “artificial transaction”, that is, that there be a loan agreement detailing the amount of interest, repayment dates,
The type of linkage, etc., otherwise the tax authorities can treat the loan as a salary or dividend subject to the 30% tax. - Dividend – withdrawal of profits from the company after “corporate tax” has been paid for them,
As of 2014, the tax is 26.5%.
Personal expenses and financing of the company’s activities
Each shareholder has a “bank account” with the company he controls.
He can create a “right balance” for himself through:
- Initial infusion of funds in the issuance of the shares. (The paid-up share capital we mentioned above).
- Payment of the company’s business expenses from his personal account.
- Providing owner loans to finance the company’s activities.
- Failure to withdraw monthly salary and more.
The balance of this right carries interest and linkage which, from the shareholder’s point of view, constitute tax-exempt income, where in 2014 the interest rate is 4.31% per year plus linkage differences.
On the other hand, in a bank like a bank, the shareholder can also have a “debt balance”,
And this through the following actions:
- Cash withdrawals used for private needs.
- Private expenses made from the company’s account.
- Private expenses made on credit cards.
The balance of this obligation carries interest and linkage which constitute income for the company, where in 2014 the interest rate is 4.31% per year plus linkage differences.
When there is in this case the company will pay VAT for this expense, so that in practice the interest includes VAT 5.085% annually.
In conclusion:
Like anything new in our lives, successful management of a company requires learning and acquiring new habits.
Experience shows that proper guidance and professional advice are the key to success in leading a learning and change process.
Successfully!