Complicated pre-trading/wages question

[KatyMac]

OK I have a business (I am a sole trader) and I employ staff

I am starting a new business which is a workers co-op

The new business is not trading yet (& won't be for the next 6 months or more)

I will be loaning the co-op a large sum of money

I need to employ someone now to do some work for the new business

Can I pay them through the existing business?

And work out how much it is (ie pay plus NI plus holiday pay) and borrow it from the loan that I will be giving the company

Or is that impossible

I think that there are two areas that you need to consider carefully:-

a) what are the employee's rights and duties and what happens when these need to transfer to the new business?

b) will you get a tax deduction for the cost of the employee against your D1 profits form the existing business?

What will the legal structure of the co-op be? eg limited company, limited partnership, trust?

For b) if there is only 6 months or so overlap then you should be able to get a deduction if only by you as sole trader invoicing the co-op for the employee's services.

I see I think

The employee will be working for the existing business and the new business side by side

There is an existing contract & there will be a new contract (starting now - but I'm not sure who with me/co-op/existing business)

The Co-op is a ltd company (I think)

I think I get the invoicing thingie

So re employment contracts I see 2 issues:-

a) continuity of employment - this is important as continuity of employment provides greater rights to the employee. And this isn't something that can just be manipulated through issuing new contracts. I would be surprised if your employee wouldn't have some protection under say TUPE though it depends on exactly what the job is and how it varies over the period.

b) presumably this employee will be one of the founder members of the co-operative. I'm a bit surprised that you're setting up a co-op for a nursery as a company limited by shares, as presumably this will entail a sale of shares every time an employee joins/leaves , which is fairly expensive (and not necessarily attractive to a relatviely low waged incoming employee). Or is the idea that the loan is so great that in effect the value of the company is negligible, in which case you are bearing all the commerical risk in exchange for interest and the employees get the upside. IME co-ops are usually companies limited by guarantee or mutual societies.

OK

a) both contracts will be with the current business with a new contract with the new company if she wants to work there when it opens (I think she will)
Initial job is childcare, new job is research, eventual job will be deputy (probably)

b) No - because she hasn't passed her probation period yet - so she can't be. The Co-op doesn't have any shares no buy in or buy out is needed. If we go bust all the assets have to be passed to another co-op and everyone has to pay a £1 towards any debt.

I think I am out of my depth explaining this (which is sad because I thought I understood it)

The reason for the co-op is the loan - as we have no assets

OK I checked

Definatly limited by Guarantee but only to £1 each

So out of interest, why a co-op? You can limit your downside risk by having a company limited by guarantee, but here you are limiting your upside risk.

I'm not an HR specialist, but I suspect that this employee's 3 contracts will probably all count as a single employment when it comes to certain rights. Such rights only come into play after either 1 or 2 years (depending on the rights).

Sorry I meant that you can limit the downside risk by having a company limited by share capital. But at least you own the business so if it goes well you get the profit.

But if I borrow from a bank (remember the new compnay has no assets) I would have to put p my house - whereas if we borrow from the co-op people I don't........basicaly

Does the interest rate reflect that?

OK fair enough you avoid the downside risk, but why go to all of this effort if you're not going to enjoy the benefit if it is successful? Seems very altruistic.

ALso what about your personal risks? If something happens to you healthwise 5 years down the line meaning that you could no longer work, then you walk away with nothing? (as opposed a business that you could either coninue owning and earning profits from, or could sell.

Same Interest rate (well actually a bit less - because without the co-op I'd have to use the small firm business guarantee which is an extra 2(3?)% each year

I am loaning the business a lump sum which will be paid back at above base rate so I will have some protection

Plus the other business will carry on producing an income (hopefully)