Under the law, a limited liability company has the same status as a natural person. Because of this, you cannot treat a limited company’s bank account like your own and take money out whenever you choose.

It’s natural to feel that you have free rein over the cash flow of your limited liability business at any time after it’s been established. This needs to be corrected and may result in legal and financial issues for directors of failing companies.

Your company is separate from you

Upon incorporation at Companies House, a limited company acquires the status of a separate and distinct legal body. The company, rather than the owners or shareholders, is the legal owner of all assets and profits. Therefore, you cannot take personal funds out of the company as a sole trader proprietor can.

Sole traders (self-employed) are, effectively, the business; hence it is their money and debts. The directors of a corporation are shielded from personal responsibility for business obligations, unlike the owners of a sole proprietorship or a general partnership.

Monitor Director’s Loan account

It is essential to keep track of the following information regarding the Director’s Loans:

• the amount of money a director lends to the company;
• Cash taken out by a director from the company

These records are generally housed within the Director’s Loan Account. It would help if you talked to your accountant about your goals before borrowing money from your Limited Company since the amount borrowed could trigger certain taxes.

If your withdrawal is smaller than the amount of cash you put in your company, then are not borrowing any money and are instead withdrawing your own money.
Depending on how much money you take out, the Director’s Loan Account will either be in the red (overdrawn) or have a positive (surplus) balance. Surplus means you have put in more cash in your company than the amount you have withdrawn. As long as your account is in surplus, you are free to withdraw the funds whenever you like, tax-free.

If you take out more money than you put in, it is considered a loan to the director.

Withdrawing Cash from your Company

Funds are available for withdrawal by directors of limited corporations in the following ways:

1) Salary

2)  Dividends

3) Director’s Loan

Using a mix of these strategies can be a highly effective strategy to reduce one’s tax burden while managing a successful company.

What taxes will the company be liable for?

If your director loan is outstanding for over 9 months after your corporation tax accounting period, the company may have to pay an additional instalment of Corporation Tax. You are referred to as a “Participant” if you are a manager or a possible investor.

When, as a Director, you pay the company to clear your outstanding Director’s Loan account, HMRC will refund you the additional corporation tax paid on the loan.

Is the company in trouble?

The company’s continued existence is at risk if taxes or other debts must go unpaid due to insufficient funds. Cash withdrawals as Director’s loan should be avoided.

Further withdrawals will mean the directors are just building up a negative balance which will need repaying if the company becomes bankrupt and enters liquidation, pre-pack administration, or voluntary company arrangement.

Please don’t assume you can avoid dealing with the issue by ignoring it or pretending it doesn’t exist. Potential penalties and investigations by HMRC are possible. You will be considered a debtor in the event of liquidation, and the liquidator may pursue you personally to recover any funds owed to the firm. You may lose directorship status if you have taken excessive loans or misbehaved.

Your money to the company

A Director’s Loan Account is where business monies can be deposited and withdrawn legally by directors and officers. To reflect that a limited company exists independently of its owners and directors, the Director’s Loan Account is treated as such in your company’s books.

Putting up your own money as a down payment on a new firm is expected. The Director’s Loan Account is where these details will be recorded. All additional personal contributions to business costs will be recorded as well. These deals are like making a loan to the business, and you can expect to get your money back at some point down the road.

Seek advice

As a Director, you have a legal responsibility to ensure your company remains viable and is able to pay its debts when due.

Using the company’s cash as your personal fund is likely to lead to higher tax bills and expose you to legal liability when the company is not able to meet its debts as a result of abusing the Director’s Loan.

It is important to seek your accountant’s advice to ensure you are on the right side of the law on Director’s loan.

Please do not hesitate to contact Southside Accountants in Wimbledon for support,