Director’s Loan Account
So you have recently setup your own limited company, the most tricky question which may come to your mind is What is Director’s Loan Account and how does it work? It may be hard to get your head around but trust us it’s not that complicated. We assure you by the end of this blog you will understand it if not full but most of it.
What is not classed as Director’s Loan Account:
Please note like your business bank account, director’s loan account is not a real bank account. This is a virtual account that stays in your books. Let’s see below more about it.
What is Director’s Loan Account:
Director’s Loan Account also shortened as DLA most of the time is a virtual account that exists in your accounting books or records as a proof of flow of money between yourself and the Limited Company. Unlike if you were sole trader, your money earned belongs to you, whereas legal definition of Limited Company explains that company is a separate legal entity and you are different then your company, therefore, any money earned by the business belongs to business not you. If you wish to borrow money from your own business or lend it to your business all transactions will be recorded in this DLA.
- Lending To Your Company through Director’s Loan Account:
There may be times when the company might need help with a cash flow, whether in the good days or if things are tight. When you do this you are making a loan to the business. Let’s say if you put £1000 of your own cash into the business bank account, then this is the amount business owes you and this will be recorded in DLA credit balance.
It’s not always that you would put cash in business account to lend money to your business. Likewise In the event if you have purchased things for the company with your very own cash, it is similar as you have lend to your business.
Again it’s not always cash entered in business account or goods bought from your company. Company can also owe you money through payroll, like if company is struggling for cash and you allow company to defer your salary payment this will be recorded in DLA as company owes you that money.
The essential thing to recall is that you can reclaim this cash whenever, given that the business has enough resources to do so. When you loan cash, you are a basically a bank to the business and like some other lender, you can take repayments of your credit given to your company. Be that as it may, you ought not treat yourself more favourably than any of alternate lenders.
- Taking cash out from Business or withdrawing Director’s Loan Account:
You can take money from the company through profits or by means of wages or, as referenced above, to pay back a credit you have already made. When you take money from the money that isn’t an advance reimbursement, wage or profit, then it’s the other way around of the above, in this case you are borrowing money from company. This may be for your personal spending on the business bank account, pulling back money for private use or simply transferring money to your own personal bank account.
Frankly speaking many Director’s borrow money form their business during the year and then choose to settle it at the year-end by paying off dividends to themselves. This is although fine but there are few fundamentals need to watch out when doing so.
You could read a little more about DLA here.
Should you wish to discuss or need to more about DLA please contact us here.