Alphabet Shares Tax Planning: How They Work in OMBs

21 January 2024
When discussing profit Extraction for Owner-Managed Businesses (OMBs), one strategic approach gaining prominence is Alphabet Shares Tax Planning. This innovative tax strategy involves the creation of different classes of shares, each with distinct rights and entitlements.
building block letters stacked in a pile
Alphabet Shares Tax Planning is a method used by OMBs to allocate and extract profits in a tax-efficient manner. This involves issuing shares with different rights (e.g., voting, dividend, and capital distribution rights) to shareholders.

By customising the attributes of each share class, businesses can tailor their profit distribution strategies to align with the overall financial objectives and tax landscape.

Alphabet Shares Tax Planning Examples

Let's take a look at two examples:

Example 1: A-B-C Shares Structure

Consider an OMB called XYZ Ltd. The company decides to implement Alphabet Shares by issuing three classes of shares: A shares, B shares, and C shares. A shares might hold voting rights, B shares could be entitled to high dividend payouts, and C shares may have preferences in terms of capital distribution.

This arrangement allows the business owners to extract profits in a way that minimises their tax liabilities. For instance, they can choose to receive income in the form of dividends, which might be more tax-efficient than salary payments.

Example 2: Growth Shares and Alphabet Shares

In another scenario, a technology startup issues Alphabet Shares to its founders. The founders receive Growth Shares that entitle them to a share in the company's future growth. These shares carry minimal voting and dividend rights initially but become increasingly valuable as the business expands.

This strategic use of Alphabet Shares allows the founders to benefit from the company's success in a tax-efficient manner. As the value of the shares grows, the founders can eventually realise capital gains, which may be subject to lower tax rates than ordinary income.

So what's the significance of alphabet shares in OMBs?

Significance of Alphabet Shares Tax Planning in OMBs

Alphabet Shares Tax Planning is significant for OMBs for several reasons:

Tax Efficiency

Alphabet Shares enable businesses to allocate profits strategically, taking advantage of different tax treatments for dividends, capital gains, and salaries. This flexibility allows OMBs to minimise overall tax liabilities.

Succession Planning

By tailoring share classes to meet the needs of different stakeholders, including family members and key employees, OMBs can use Alphabet Shares to facilitate succession planning. This ensures a smooth transition of ownership while maintaining tax efficiency.

Motivating Key Personnel

Alphabet Shares can be a powerful tool for motivating and retaining key employees. By granting them shares with specific rights, such as performance-related dividends or future capital gains, businesses can align the interests of employees with the long-term success of the company.

What Other Tax Issues Are There in Profit Extraction?

Alphabet shares tax planning stands as a powerful tool for OMBs seeking to maximise profit extraction while minimising tax liabilities.

The above examples demonstrate how strategically allocating rights among different share classes can enhance dividend distribution efficiency and capital gains optimization. As businesses strive for financial efficiency and sustainable growth, understanding and implementing alphabet shares tax planning becomes a crucial element of effective tax management.

To delve deeper into the intricacies of profit extraction and succession planning in OMBs, enrol in the Profit Extraction and Succession Planning in OMBs course offered by Redcliffe Training. This comprehensive course provides in-depth insights into tax-efficient strategies, including Alphabet Shares, tailored specifically for OMBs.


Do you pay income tax on dividends?

Yes, in many countries, including the United States, individuals are required to pay income tax on dividends. Dividend income is generally considered taxable, and the tax rate may vary based on factors such as the individual's overall income and the type of dividends received.

Which model is most commonly used in succession planning?

The 9-box grid model is commonly used in succession planning. It assesses an individual's performance and potential, positioning employees in a matrix to identify high-potential candidates for leadership roles. This model aids organisations in making informed decisions about talent development and succession strategies.

What are the rules for dividend waiver?

Dividend waiver rules vary by jurisdiction, but in general, they involve a shareholder giving up their right to receive a dividend. The process often requires a formal written waiver and compliance with legal and regulatory requirements. Waivers are typically used for tax planning or restructuring purposes. It is crucial to consult specific corporate and tax laws in the relevant jurisdiction and seek professional advice for accurate and up-to-date information.
Eager to learn more about alphabet shares and profit extraction? Click below to find out more about Redcliffe Training’s Profit Extraction and Succession Planning in OMBs Course:

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