Some directors see putting personal money into a limited company as a simple solution to fixing short term cashflow issues they may have in their business.
It maybe a simple solution and the business can repay the director as soon as its cash rich again.
Should the business struggle to ease its financial worries, the money may never been repaid.
We have made a quick guide for directors thinking about putting personal money into a limited company.
Why does the business need your own money?
The business may need the directors personal money for a number of reasons, one of the most important things you can do for your business is to invest your own money into it. There are a number of reasons why this is the case.
First of all, when you invest your own money into your business, it shows that you have faith in its future success. This can be helpful in attracting other investors and lenders.
Secondly, putting your own money into your business gives you a personal financial stake in its success. You will be more likely to carefully manage finances and make smart decisions if you have skin in the game.
Finally, investing your own money can help to build goodwill with customers and suppliers. They will see that you are committed to the long-term success of the business and are more likely to work with you on favorable terms.
In short, there are many good reasons to invest your own money into your business. Doing so can help to ensure its future success.
If you lend your company money
If you lend your limited company money, there is no Corporation Tax to pay on money you lend it.
You can charge the company interest
If you lend your limited company money you can charge it interest on the money, the interest that you charge the company on the loan will count as both:
- a business expense for your company
- personal income for you
You must report the interest eared as income on a personal Self Assessment tax return.
Your company must:
- pay you the interest less Income Tax at the basic rate of 20%
- report and pay the Income Tax every quarter using form CT61
Director’s loan accounts
When directors introduce personal money into a business, an accountant or bookkeeper will record this as credit to their director’s loan accounts.
If funds are taken out of a limited companies that are not salaries, dividends or expense repayments should be accounted for as debits to their director’s loan accounts.
At year end reporting of the financial year, the total owed by them or the company to each other should be included on the balance sheet.
If there is an overdrawn director’s loan accounts, you or the company may have to pay tax, depending on whether the accounts are in credit or overdrawn.
Regulations for director’s loan accounts are stipulated in the Companies Act 2006.
What happens if the business enters liquidation?
If the business enters liquidation and you have personally introduced monies, you are called as a creditor. To ensure you are in the hierarchy of payments, the money needs to be introduced with a charge on the limited company by the person introducing the monies.
There is a hierarchy when a business enters liquidation, this is as follows: secured and preferential creditors first and foremost, before unsecured ones, including customers and suppliers.
When a company enters into liquidation there’s often very little money left to share between unsecured creditors. This is why a charge is required to secure your introduction of cash into the business.
F.A.Q’s
Yes directors can put their own money into their own limited Company, this will be introduced as a credit in the Directors Loan Account.
In summary
Using personal money to introduce into a business is always a risk, even more so if the business is suffering from financial hardship. The introduction by directors of personal funds is quick and cost-effective way to resolve short-term cash flow problems, in some scenarios.
The introduction of personal money into a limited company is nevertheless a risk, particularly if the cash flow problems are due to insolvency.
Recording transactions of cash introduced into the business via a director’s loan accounts is a good way to demonstrate you have made a credit into the business but you are also class you as an unsecured creditor.
However, this does not guarantee your money back should the business enters liquidation.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.