Do I need to pay tax on shares earned?

I am working on a project in my spare time with a friend. The project has the potential to make money in the future.

We want to run the project democratically and non-hierarchically. We have decided to achieve this we will value our time, and anyone else that works on the project, equally at 1 share per day worked. We don't have money to pay anyone and doing this will directly tie time invested in the project to the share of any profits when we exit.

I have two questions:

In UK law:

1. When does a side project have to legally be registered as a company?
2. If we are essentially paying ourselves in shares, do we need to pay tax on the shares we are earning?

Thanks

This sounds way too complicated and not an appropriate way to allocate shares in a UK Ltd company.

You have to set up the Ltd company (trivial, see here ) and when you do, you specify how many shares are available, where the registered address is, who the directors are, etc.

You are meant to keep paperwork to show allocation of additional shares and this is likely to be cumbersome with the scheme you've suggested, although I suppose this could be done in batches, say quarterly. Also. once you start, you are expected to perform certain tasks, such as Annual Returns, Corporation Tax Returns, etc.

If you want to avoid all these complications, at least in the short term, you could invent a notional "share" which you "earn", then once you get to a stage where you need to form a Ltd company, you convert the notional shares into actual shares.

I'd be interested to here how this also might work legally in other
countries.

In the US this would be considered taxable ordinary income, taxed as salary (i.e.: including payroll/SE taxes) at FMV (fair market value) of the shares at the moment they vest (i.e.: allocated, since you didn't mention any vesting schedule). The gain you recognize if (when) you sell these shares will be the difference between that FMV and the market price when you sell, and taxed as capital gain.

I would be surprised if it is significantly different in the UK.

Note that for the shares to be allocated, there has to be a company in existence (registered with the authorities, etc). Your accountant will help you with the valuation to calculate the FMV, but daily allocations may complicate things since you'll have to calculate each allocation FMV separately.