What is the Director’s Loan Account?
We have heard about the director’s loan account and some of us also keep some knowledge related to it. However, in this article, we will learn in detail about the facts which everyone should be aware of regarding the director’s loan account.
The Director’s loan is nothing but money in your limited company bank account but doesn’t belong to you which means money taken from the company which is not expense repayment, salary or dividend. Also, this money is not something you’ve previously paid into or loaned the company.
What is the Purpose of The Director’s Loan Account?
The importance of the director’s loan account is as follows:
- To boost your finances and to bridge the gap temporarily until company profits allow dividends to be paid out, the director’s loan account is used.
- As the name suggests, for taking the director’s loan, you have to be the director of the limited company.
- For starting a business, the company’s expenditure can be funded by loans from its directors. However, when the company’s fund allows, it can be repaid.
- Director’s loan account contains the detail regarding cash withdrawals and repayments made as a director, loan interest charged and personal expenses paid with company money or a company credit card.
- The interest rate charged will affect the tax due if you borrow or lend money to your company via a director’s loan account. Therefore, in such case advise as well as suggestion from HMRC or your accountant is very much necessary and essential.
- A high number will feature an overdrawn director’s loan when companies face financial problems. The loan can be write-off by the company itself, however, it is not uncommon for a liquidator to ask the company director to repay the loan to pay the company’s creditors and reverse this.
- An overdrawn director’s loan account is where you, as a director, have taken money from the company that is not salary or dividend and the amount exceeds what you have put into the company.
- The rules for an overdrawn director’s loan account states that the director’s loan must be repaid within 9 months from the company’s year-end. It should be considered the company’s assets and if the company becomes insolvent then liquidator is likely to chase the balance of the loan.
- Through annual company returns, HMRC always keeps a close eye to directors’ loan account. Therefore, all the records should be complete and accurate.
The director must understand that if too much money is borrowed and the company is unable to pay its creditors, the company might be forced into liquidation and legal action can be taken by liquidator against him to reinforce the debt. Therefore, it should be noted down that whenever the director borrows money from the company, good record keeping is necessary to ensure the right taxes are paid.
It is always a wise decision to use the best accountant as strict bookkeeping and accounting are also extremely important when dealing with the director’s loans. Director’s loans are tricky area, so should not be used lightly and instead, it has to be handled properly.