Small Business Advice

What is a Director's Loan?

07 Dec 2015

Director loans

If you need help or advice with any aspect of directors loans, ranging from whether a loan makes sense commercially, the tax issues or potential legal aspects, we can help.

In a small business’s early days the business owners may loan money to the company when other sources of funding are hard to come by, but as the company grows they may want to take money out of the business.

Assuming these funds do not represent the repayment of an outstanding loan to the business, and if the amount is over and above the director’s salary, expenses and dividend payments, this money is classed as a Director’s Loan and must be recorded in the Director’s Loan Account (DLA). The company and the director must also comply with stringent HM Revenue and Customs rules when recording and repaying director’s loans.

Directors loans - loan from company to director

These are the steps a business owner should take when borrowing money from their own business.

Check the Articles of Association

While most standard Articles of Association permit a company to loan money to a director, it is worth checking your company’s own Articles before arranging the director’s loan. If you are still unclear after that it could be worth speaking to us before proceeding.

Agree the terms of the loan

The company can agree to offer the director an interest-free loan, or charge interest below the official interest rate, but it is important to bear in mind that this will represent a beneficial loan agreement and could result in a tax liability for the director.

Record the loan in the Director’s Loan Account

The Director’s Loan Account is used to record any money directors pay into or borrow from their company. In the case of a loan by the company to the director, details of the amount of the loan, agreed interest rate (if any) and any repayments that have been made must be recorded in the Director’s Loan Account. 

We offer cost effective advice and services for all aspects of directors loans, from tax to the right documents to evidence and legally record the loan. We can also help if disputes arise about directors borrowings especially with small companies where directors and shareholders are the same people.

Keir Wright-Whyte

photo

Managing Director

0207 043 4000

About the author

Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices.The deception extended to the usual training in audit and associated activities.

Keir subsequently worked in a number of advisory roles with clients including in the energy trading, pharmaceuticals and financial services sectors.

He loves working at Accounts & Legal because of the variety of work and clients, the excellent team ethos and morale, the importance placed on genuinely helping and being useful for clients and because he believes what he does matters to clients and helps the firm.

Keir's primary role is to ensure that new clients with complex businesses or needs are on-boarded in the best way and he is a "trouble shooter" both for clients and where complex issues arise internally. He also helps the accounting teams strive to improve what we do for clients, whether processes or services.

When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.

  

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