Limited Companies

Summary Guide to start up & running your business.

If you are looking at running your business as a limited company or already have a limited company, this guide should be useful for best practise and summary advice on running your financials for your business.

Personal Liability

By setting up a limited company, you gain protection against personal liability for the debts of your company, although if serious problems, it may difficult to avoid further personal action if funds are not available due to personal withdrawals.

Presenting a professional and clear financial business

It is important to present a strong financial picture if you’re growing your business. Banks, investors and creditors will look carefully at your accounts, personal withdrawals can distort the picture.

Banking

A Limited Company MUST have it’s own bank account to run the business, it is a distinct own legal entity from the Shareholders and this is a legal requirement. 

Personal Expenditure

You should keep personal and business transactions separate, keeping and maintaining accurate financial records for your accountant and tax calculations.

Your business is a separate entity from yourself and you should not simply withdraw cash as and when you want, the income generated does not belong to you, unless taken as salary, dividends, directors loan and expenses.

If the business bank account is used to fund personal items, this makes your accounts more complex for your accountant and may be more costly to prepare your accounts at year end, this includes, direct debits, cash withdrawals, using the company credit or debit cards.

Using the business bank or personal expenditure makes it hard to gauge cash flow for your business and can make your business cash deficit if not managed correctly.

Providing you pay back the money to the business as soon as possible, there is nothing illegal about the withdrawal, but there are risks involved in mixing business and personal transactions.

Any amounts remaining unpaid at the end of the financial year must be reported to HMRC and will be liable to tax and National Insurance.

We suggest to minimise cash withdrawals unless you have no alternative. Banks & accountants are required to report suspicious activity to reduce fraud and money laundering.

Withdrawing money from your limited company

A Limited Company must be run as a business, Directors should not use the business for personal expenditure, it is not illegal but is not best business practice. Technically you can withdraw money from your business account and use it any way you see fit, provide you keep detailed accounting records and repay the funds as soon as possible.

Best business practise it to either; take a salary, take dividend payments, directors loan or reimbursement for business expenses that you have paid through your personal account. 

Taking a salary

This is the simplest way to take money out of you company, a regular salary. You will need to deduct any tax, National Insurance and Employer’s National Insurance contributions due and make payments to HMRC monthly or quarterly.

You must register as an employer prior to taking a salary, HMRC will send you some two PAYE codes for you to report and pay contributions due each month.

The salary and Employers National Insurance contributions reduce your company profits and therefore reduce the business’ corporation tax liability.

Taking Dividends

Dividends are a personal tax-efficient method of receiving money from your business. Funds to pay dividends are available from any remaining profit after payment of corporation tax.

You may wish to leave some profit in your business for investment or other business purposes, but you can take the remainder as an alternative to salary or withdrawals.

Dividends are usually paid at the end of your financial year, so they do not provide short-term funds.

Your accountant would be able to advise the best practise for withdrawing dividends.

Dividends do not reduce your company profits and therefore have no impact on the business’ corporation tax liability.

Dividends must only be paid when a company has sufficient distributable profits  to support them, otherwise they are deemed illegal.

Directors Loan

You can arrange a director’s loan from your business to put funds into your personal account, similar to making funds to your business if it needs funds.

You should aim to repay the loan to the business before the end of the financial year. If you do not you will be liable to a tax charge, S455 on the outstanding balance.

An ‘overdrawn’ directors’ loan account at the end of the financial year end, and not repaid within 9 months and one day after the company’s accounting reference date, will incur interest and corporation tax on the amount unpaid. 

In some instances the directors loan will also need reporting on your self assessment return if not repaid in the allotted time after your company year end.

A director’s loan can be a useful low-cost or interest-free source of funds to meet short term personal requirements.

You should speak to your accountant for advice before taking money for you business, to ensure you are meeting all tax requirements and using funds efficiently and legally.

Business Expenses paid by your personal bank

You should normally cover business expenditure from your business bank account. But sometimes there may be on-off costs from your personal bank account, providing the expenditure is wholly for business purposes, you can receive reimbursement for the costs, on proof of receipt.

 

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