Acceptable level of involvement
HR writes: I have spent the past two years working in an early stage venture, which is struggling to develop into a business to support me and the other two founders. I am considering leaving the company but would like to keep my shares. My concern is whether or not I will get entrepreneurs’ relief on my shares if they become valuable and the company is sold. I am told that if I am not working in the business then I would need to remain as a director to receive relief on the sale.
I am also querying how much I would be exposing myself to a risk if the company folds? If I am not involved with the business on a day-to-day basis, does this exclude me from the responsibilities of being a director?
Entrepreneurs’ relief can reduce the tax payable on gains on the sale of shares from 28% to 10%, so can be worth protecting, writes Jon Sutcliffe, partner at Kingston Smith LLP. To qualify, you will need to hold 5% of the company and either be a working employee or a director. Your directorship is therefore the key to retaining entrepreneurs’ relief.
If the company folds, all directors may be jointly and severally liable should a liquidator feel there are issues that require further investigation. In the eyes of the law, when determining whether directors should personally contribute to creditors, there may be no distinguishing between executive and non-executives. Each director is assessed on both a subjective and objective basis, determining both his/her ability to have known about the position (ie an accountant is expected to be more financially aware than a gardener), and how a reasonable director should have behaved.
It is always dangerous to take such a non-active role, as you cannot absolve yourself by agreeing that you are not to be involved in the management of the company. Indeed, the Insolvency Service would not look favourably on a director who deliberately did this. As such, you should, as a minimum, take part in regular board meetings to keep yourself apprised of the financial position of the company.