Chris Thorpe looks at the role played by directors’ loan accounts in owner-managed businesses.
One of the first things that a sole trader looking to incorporate their business must get into their heads is that the money within the new company is not theirs. They can no longer casually extract vast wads of notes from the ATM each Friday evening once a company is in place, as that money belongs to the company.
If the owner (now shareholder or director) wants the money, it will often be declared as a salary or a dividend and taxed accordingly. Pensions and charging a rent for use of premises may be an option, but the most common alternative way of withdrawing funds is to borrow them.
Loans from the company
These borrowed sums may subsequently be written off or left,