The company is its own legal entity which is separate from you. The company will have its own assets and liabilities. Assets will be in the form of cash at bank and in hand, debtors, equipment and machinery which will all belong to the company and not you personally. Liabilities will be in the form of company credit cards, trade creditors, loans and overdrafts which the company is liable for and not you personally (unless, of course, a personal guarantee has been provided by the director)
The key point to remember here is that you and the company are separate legal entities.
When running a limited company, it is important to remember that the money held in the company bank accounts belongs to the company and not you personally. Directors should therefore refrain from using the company bank account as a personal account for personal transactions and to fund personal purchases as this can result in high tax charges when an overdrawn directors loan account is created.
Directors who are also shareholders of a company should take their remuneration in the form of salary and dividends and the dividends should be planned and structured to maximise tax efficiency.
Interim and final dividends should be agreed and voted by the shareholders before they are paid and can only be taken from the company by its shareholders if there are sufficient distributable profits. Directors who use the company account as a personal account could risk running up an overdrawn director’s loan account. An overdrawn director’s loan account represents the money owed back to the company by the director (shareholder).
If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) corporation tax is due at a rate of 33.75% of the original loan, or 32.5% if the loan was made before 6 April 2022. After you permanently repay the original loan, you can reclaim the Corporation Tax - but not interest.
We would recommend speaking to your accountant to assist you with remuneration planning to avoid running up an overdrawn director’s loan account and incurring high tax charges.
If you are new to running a limited company and need assistance with remuneration planning and dividend structure we can help you.
Comments