There are a few common pitfalls with limited companies, which are worth sharing and making you aware of, especially if you are the director of an owner managed company.
Profits and withdrawing monies
– Not understanding that profits earned by the company and monies/assets held by the company belong to the company, not the directors or shareholders.
– Directors taking money out of the company which is not owed to them, resulting in an overdrawn directors’ loan account, click here for more info on directors’ loan accounts.. This causes potential tax issues and is a particular concern if the directors’ loan account is not repaid to the company within 9 months of the company year end.
– Money being taken out of the company, with the directors hoping to clear the overdrawn directors’ loan account later by dividend (if they are also shareholders of the company). However, later finding there are not enough profits in the company to declare a dividend and so they cannot clear the directors’ loan account within 9 months of the year end (which creates tax charges). In addition to this, the directors usually then find the monies in the company bank account are not sufficient to pay the corporation tax for the year which has just ended, as they have withdrawn the monies.
– The company paying for non business or mixed (business and personal) expenses for a director or shareholder, without appreciating that there could be income tax and national insurance consequences.
– The directors using a company asset for private purposes, which could also lead to high income tax and national insurance consequences.
Off-payroll working and IR35
– The director performing work for a customer which, if you ignored the company, would really be an employee/employer relationship between the director and the customer in the eyes of HMRC. Thereby being caught by IR35 with high tax consequences.
– The directors moving monies into a deposit account which is not in the name of the limited company, thereby creating an overdrawn directors’ loan account (if the account is in the name of the director) and resulting tax issues.
How to avoid these common pitfalls
The key to avoiding the above, is to have an open dialogue with your accountant/tax adviser so that they can guide you through the process of running a limited company and help you avoid some of the common pitfalls. Also, to speak to your accountant/tax adviser before you undertake any out of the ordinary transactions so they can advise you on any potential tax consequences and, if possible, on how they can be structured more tax efficiently.