As has already been explained, the directors run a limited company and the shareholders (members) own and fund it. This guide looks at the different types of director and what they do. The directors may also be shareholders and are answerable to the shareholders.
2. Types of director
Remember, directors are legally bound to act in the best interests of the company, not the shareholders.
There are 2 broad types of company director, with distinct differences between them.
- executive director
- non-executive director
Executive directors are involved in the day-to-day management of the business and perform operational and strategic functions such as managing people, looking after assets, managing contracts and so on.
They are entrusted with making sure that the information presented to the Board of Directors is an accurate reflection of their understanding of the affairs of the company. They are generally employees of the company and are paid a salary.
There is no requirement for a set number of executive directors in a company - it is usually dependent on the nature, size and complexity of the company’s business.
Most companies appoint a Managing Director or Chief Executive Officer who has the overall management and leadership role.
A non-executive director’s role is less hands-on and they are not usually involved in the day-to-day management of the company. They use their experience and expertise to provide an independent voice and perspective to the company.
The non-executive director has the same legal duties and responsibilities as an executive director.
A non-executive director may be appointed to carry out a specialist role on a part-time basis or for their expertise in specific activities. They usually work part-time, attending board meetings and spending time on specific projects. They may be employed, but are more likely to be self-employed and receive remuneration under a contract for services.
Non-executive directors provide an objective view of the business, can improve the board’s effectiveness at relatively low cost and provide valuable business connections.
3. Number and function of directors
A limited company can operate with one member (shareholder) and one director – and they can be the same person. This is often the case for a new business. As the business grows, it is advisable to expand the number of directors and consider appointing non-executive directors for specific support.
The company may also appoint a company secretary. The position of company secretary is optional (since changes to the Companies Act 2006 came into effect in April 2008), but the duties of the company secretary must be performed by a company director if there is no company secretary.
The company director is responsible for running the business, and the company secretary (or director if there is no company secretary) must ensure that all the statutory procedures are carried out and complied with. This includes maintaining the statutory registers, providing notice of and dealing with minutes of meetings and filing forms at Companies House.
The company secretary is an officer of the company and as such may be held criminally liable for defaults committed by the company.
Whether there is a company secretary appointed or not, the director is the person who bears responsibility for the actions of the company.
4. What does a director do?
A director is one member of the board of directors of a company and the board is responsible for:
- determining the company’s strategic objectives
- monitoring progress towards achieving those objectives
- appointing senior management
- accounting for the company’s activities to relevant parties, for example, shareholders
The managing director or chief executive officer is responsible for the performance of the company as directed by the board’s overall strategy.
In the case of a small business, there is often a working board that is involved in the day-to-day activities of the business – and sometimes the owner may be the only director for the company. This means they are both managing and directing the business - managing the day-to-day activities, including sales, marketing, HR, operations and finance and also directing strategy and planning.
As the business grows, they may consider employing people to take on these various roles – either in-house or by outsourcing. They could also consider expanding their board of directors.
Use this template to identify the primary responsibilities between Board of Directors and the company’s management team and employees.
5. How directors are paid
The issue of directors’ pay has been hotly debated over recent years, primarily because of huge pay-outs by very large organisations. However, it is important to appreciate that both executive and non-executive directors provide services to the company for which they deserve to be remunerated.
Executive and non-executive directors can be compensated by fee, salary, shares, share options, pension provision, company cars or incentive schemes – or, as is more usual, a combination of a number of these. The amount and make-up of the remuneration package is a matter of agreement between the individual and the company, but cannot exceed the amount specified in the Articles of Association.
Executive directors generally have an employment contract with the company in which their remuneration is agreed. In many cases, non-executive directors have no formal contract with the company but are paid a standard level of fees for attending board meetings.
Looking at the issue as the business owner and director of a limited company, you can take money from the company in 3 ways.
Salary, expenses and benefits
If you want the company to pay you a salary, expenses or benefits, you must register the company as an employer with HM Revenue and Customs. The company must take Income Tax and National Insurance contributions from your salary payments and pay these to HM Revenue and Customs along with employers’ National Insurance contribution.
Bonuses paid to directors are not, as is sometimes thought, tax-free, but rather they are simply part of remuneration and are subject to Income Tax and National Insurance in the normal way. Bonuses are commonly calculated and paid following the company’s accounting year-end.
The company can make personal pension contributions on behalf of the director and a tax deduction is permitted if the contribution is made within the rules. Difficulties can arise if HM Customs and Revenue decide that the amount of pension contribution made is inappropriate having regard to the actual duties and responsibilities of the director concerned. Similar problems can arise if family members are on the payroll.
A dividend is a payment a company can make to shareholders if it has made enough profit. Your company must not pay out more in dividends than its available profits from the current and previous financial years. Dividends cannot be counted as business costs when you work out your Corporation Tax.
Dividends must be paid evenly to all shareholders according to their level and type of investment. To pay a dividend, you must:
- hold a directors’ meeting to ‘declare’ the dividend
- keep minutes of the meeting, even if you are the only director
For each dividend payment the company makes, you must write up a dividend voucher showing the date, company name, names of shareholders being paid a dividend, the amount of the dividend and the amount of the dividend ‘tax credit’.
Dividend tax credits – the tax credit means your company and shareholders do not need to pay tax when the dividend is paid. You must give a copy of the voucher to recipients of the dividend and keep a copy for your company records.
Speak to your accountant for advice on how to calculate the dividend tax credit.
If you take more money out of the company than you’ve put in (and it isn’t salary or dividend), it’s called a directors’ loan. If your company makes directors’ loans, you must keep records of them. There are also some detailed tax rules about how directors’ loans are handled.
Speak to your accountant for advice on how to handle directors’ loans. Full details are available at HMRC website.
When putting together policy on remuneration for directors, make sure you have a procedure that is formal and transparent. New directors’ remuneration report regulations came into force in 2013. It is recommended that you get guidance from your accountant on this matter. Always seek professional advice regarding directors’ remuneration to make sure you meet all your financial and legal obligations, whilst at the same time getting the best for your directors.
6. Ceasing to be a director
You can remain as director for as long as your company wants you or as long as you choose.
The reasons you cease to be a director are:
- the dissolving of the company
- removal by members
- Under the Articles depending on their terms
You can resign or retire from the board whenever you like - check your company’s Articles of Association.
Should you wish to resign because you suspect the company is insolvent – see Section 3 above - make sure you first get professional advice.
The right to claim statutory redundancy pay and statutory notice pay only applies to workers deemed to be employees, not those who are self-employed. If the company becomes insolvent, you, as a director, may to be entitled to redundancy pay and notice pay if you meet the criteria of an employee i.e. through your contract of employment and remuneration. Make sure you get professional advice.
7. Selling up or closing the company
A company has no pre-determined lifespan. Since it has a legal existence separate from its owners, it can be a convenient vehicle in a family business enabling one generation to succeed another.
The company can be wound up either by the shareholders (members) voluntarily or by its creditors in a case of insolvency.
If, as the owner, you want to sell up, you can either sell your shares in the company or the company can sell its assets and business and then distribute the proceeds to the shareholders. The company can then be wound up and struck from the Companies House Register.
Please note, each of these scenarios has very different tax consequences and considerations and it is recommended that you consult your professional advisers to confirm the most appropriate course of action.
Next: Corporate Governance