As a director of a limited company, it’s essential to understand the legal framework surrounding taking money out of the business. While it may seem that company funds are readily accessible to the directors, this approach is misguided and can lead to financial complications. In this blog post, we explore the legalities of withdrawing money from a limited company, the different methods available, and potential implications.
1. Understanding the Distinct Entity:
When a limited company is formed and registered at Companies House, it becomes a separate legal entity, distinct from its directors or shareholders. The company’s assets and profits belong to the company itself, not the individuals associated with it. Limited liability is one of the significant advantages of operating as a company, shielding directors from personal liability for the company’s debts.
2. Differentiating between Constituencies:
It’s crucial for directors to separate their personal finances from those of the company. Each limited company comprises four constituencies:
- 1. The Company: A legally recognised entity established to run the business.
- 2. The Business: The activities and operations carried out by the company.
- 3. The Directors: Individuals appointed as officers of the company.
- 4. The Shareholders or Members: Those who hold ownership in the company.
3. Legally Taking Money from a Limited Company:
To extract money from a limited company legally, there are three main methods:
3.1. Dividends: Shareholders, who are often directors in profitable companies, can receive dividends from the company’s retained profits after corporation tax is deducted. However, dividends exceeding £2,000 annually are subject to income tax, based on the individual’s tax band.
3.2. Director’s Loan Account: Directors can have a loan account with the company, which records all transactions between the director and the company. Overdrawn loan accounts must be repaid to the company within nine months and one day of the accounts’ reference date to avoid tax implications.
3.3. Director’s Salary Through PAYE: Directors can receive a salary through PAYE and may take advantage of expenses and bonus payments. Directors must ensure they are employed as employees of the company and pay the required taxes.
Combining these methods can be a tax-efficient way to reduce personal tax obligations and operate a business. Corporation tax is currently 19%, but it will increase to 25% on taxable business profits after £250,000 from April 2023, while income tax ranges from 25% to 45%. When taking money out of a company as dividends, income tax applies after corporation tax has been paid. While you cannot completely avoid paying tax, your specific circumstances will determine if you can benefit from tax-efficient methods.
4. Considerations in Difficult Times:
When a company faces financial difficulties and cannot pay taxes or creditors, directors should refrain from taking drawings. Continuing to withdraw money during such circumstances may lead to a negative balance that will need to be repaid if the company becomes insolvent.
5. Seeking Professional Advice:
It is essential for directors to seek professional advice from experienced accountants or tax experts or solicitors if there is a legal matter to navigate the complexities of taking money out of a limited company. Expert guidance can ensure tax efficiency, compliance with regulations, and avoidance of future financial problems.
6. Closing the Company:
When the company has served its purpose, and the assets exceed £25,000, the correct way to close it is through a Members Voluntary Liquidation.
Taking money out of a limited company
Directors of limited companies must understand that company finances are separate from their personal finances. While there are legitimate ways to take money out of the company, it is essential to comply with legal requirements and seek professional advice. At JMR Solicitors, our team of experts can provide valuable guidance on financial matters related to your limited company, ensuring compliance with UK legislation, and safeguarding the interests of both the company and its directors. For any financial or legal concerns related to your limited company, contact us today at 0800 970 0539 for expert advice and assistance.
If you need legal advice around debt, contact JMR Solicitors on 0161 491 3933 or email firstname.lastname@example.org