3Spoken

October 24, 2006

Getting It Out

Filed under: Running a Limited Company — NeilW @ 10:00 am

How do I get money out of my company?

The answer to this question is surprisingly straightforward

  • Treat your company like a bank

And yes it really is that simple. You have a deposit account with your company and any transaction you make on behalf of your company goes through that account.

But like all deposit accounts you need to make sure there is some money in it before you try and draw anything out!

Setting up the account

You have one personal deposit account with the company for each individual who has one or more of these roles:

  • officer (ie. director or company secretary)
  • member (ie shareholder or guarantor)
  • loan creditor

(Where you have an employee that has a lot of expenses, you may want to set one up for them).

I name these accounts after the individual. So mine is “Neil’s account”, but you can be more descriptive if you want, e.g: “Fred’s personal account”.

Classically these accounts are called “Director’s current accounts” or “Director’s Loan accounts” or simply “DLA”. But I find the personal descriptive names more useful.

Drawing money out

Once you have an operating personal account with the company, drawing money out becomes very simple:

  • If the account with the company is in credit, you can withdraw money for personal use whenever you like up to the amount that is in there.
  • If the account isn’t in credit then you need to fill it up first.

Putting money in

To get the account into credit you have to pay something into it, and this is where the accounting and tax planning comes in. Whereas for employees you have just net salary and for sole traders/partners you have profit, a owner-managed company has to decide from a whole host of payment types.

All the payment types have one effect in common – an amount of money is paid into the personal deposit account.

In rough order of tax efficiency you have:

(Click on the links for more details)

And on top of these regular payments you have the ad hoc contributions to the personal account

  • whenever you pay for something personally the company has contracted for (services or goods).
  • balancing loan credit when you incorporate a sole trade/partnership
  • any other time you loan money to the company for any purpose (as opposed to subscribing for shares).

Separation

By using a personal account with the company, you uncouple the drawing side from the paying in side. The two need not occur at the same time. So although you draw money once a month, for example, you may pay into it only once a quarter, once a year or twice a week depending upon how you administer the company.

The value of the personal account shows you how much of the company’s cash is yours.

October 19, 2006

Company Capital Reserves – what are they?

Filed under: Running a Limited Company — NeilW @ 1:53 pm

A company has a different capital structure to that of a sole trader or partnership. On a formal balance sheet it is marked as ‘Capital and Reserves’. Essentially the accounts in there are just like any other and you can move money in and out of them. However accounting and company law requires that certain capital accounts exist and that certain amounts of money are ‘reserved’. These are known as the non-distributable reserves – in that any money in them cannot be used to pay dividends to shareholders. The common ones for a company limited by shares are:

Called up share capital

This is the face value of the shares in issue to all shareholders. If you have 100 shares in issue and they have a face value of £1, then the value of this reserve will be £100. It only goes up and down with the number of shares in issue. If the company buys some back it goes down. If it issues some more it goes up.

In public companies the value of this reserve can be substantial, and often a company will look to replace its (say) £1 shares with 1p shares simply so that more funds are available to distribute.

Share premium account

This is the amount of money subscribed for shares in excess of the face value. More often seen on larger companies that issue shares to third parties. If you have 100 £1 shares, and your shareholders paid £3 each for them then £100 goes in the ‘Called up share capital’ reserve, and the other £200 goes in here.

Revaluation reserve

This reserve holds the unrealised change in the value of investment holdings. Normally all assets are depreciated away – however assets held as investments are required to be revalued regularly by the accounting standards. Any increase in value over cost goes in here. When an investment is sold, the relevant proportion of this reserved is moved to one of the distributable reserves. It never goes onto the Profit and Loss account.

Distributable Reserves

A distributable reserve is anything that isn’t non-distributable. The main one is of course the ‘Profit and loss account’ which in the Capital reserves holds this year’s Profit and loss, plus any carried forward from previous years.

This can be, and often is, the only distributable reserve, but you can set up others. If you want you can create new reserves and move profit to them – for example an ‘Equipment reserve’ used to replenish equipment. Depending upon how you use your accounts you can treat the reserves in a similar way as you would a savings account.

Hopefully this short primer is useful. Questions below.

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