Understanding profits and dividends

PilotDean

Hello!

Could someone please tell me if my logic on this subject is correct?

Let's say that I start a new ltd company, and I immediately incur £5k costs to start up. Once I've started, though, I have very few costs. I arrange a bank loan to cover the £5k, and agree with the bank that I will repay £100/month over a period of several years.

In my first month, I don't trade, so my turnover is zero. My bank balance is near enough zero, because I've spent all of my bank loan.

In my second month, I begin trading, and turn over £3k, out of which I pay myself a salary of, let's say £900, and I repay the bank £100. That leaves £2k in my bank account.

I'd like to get my hands on some of that £2k - but would I be right to say that technically my company has made a loss (my startup costs are greater than the total turnover to date, so I haven't yet made any profit), therefore I can't take this money as dividends? If that's correct, how can I access this cash?

Thanks!

Dean

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PS - A further thought has occured to me. If my logic is correct (and it may not be), and I can't pay myself dividends until I've earnt back my startup costs, would I be better off to borrow the money from the bank as a personal loan, rather than a business loan? I could then loan the money to my company as a directors loan, and could take money out of the company as repayments of my directors loan..... I think the interest rates on personal loans are higher than business loans, but the tax savings may make this a better option, right???

firstinflight

You're right in identifying that dividends from a ltd co can only be paid out of profits.

It depends very heavily on what you used that 5k for as to whether the company has made a profit or loss. Anything spent on equipment like computers, machinery etc will go into your fixed assets line on the balance sheet and not hit your profit/loss account. If you spent it on buying trading stock (i.e. raw materials or goods to sell) then it goes into your current assets, and only the portion that you've turned over hits your profit/loss.

If you've had to pay rent/rates/utilities in advance, then that balance sits in your current assets too and gets released to the p/l over the period the bill applies too.

steve1980

Do you have an accountant? If not then get one!

PilotDean

Firstinflight - it would be for me to get the training and qualifications that I'd need to be able to work. (Don't know how important the specifics are - I'm already a qualified flying instructor and examiner, but I need to upgrade my examiner qualifications, and also pay for qualifications on a couple of types of aeroplane I've not flown before.) Would that count as a loss, do you know?

Steve, I fully intend to get an accountant - see my other thread. But I like to understand what I'm doing - it's not in my nature to just give the books to someone and let them do their stuff without understanding at least some of what they're doing! Also, I want to be sure I won't screw anything up while I'm still looking for an accountant I can work with.

Thanks!

Dean

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steve1980

PilotDean wrote: »

Firstinflight - it would be for me to get the training and qualifications that I'd need to be able to work. (Don't know how important the specifics are - I'm already a qualified flying instructor and examiner, but I need to upgrade my examiner qualifications, and also pay for qualifications on a couple of types of aeroplane I've not flown before.) Would that count as a loss, do you know?

Steve, I fully intend to get an accountant - see my other thread. But I like to understand what I'm doing - it's not in my nature to just give the books to someone and let them do their stuff without understanding at least some of what they're doing! Also, I want to be sure I won't screw anything up while I'm still looking for an accountant I can work with.

Thanks!

Dean

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An accountant will always sit down with you and give you an insight.

InsideInsurance

First thing to consider is a bank is highly unlikely to give your company a £5k loan.

The day you form the company it is only worth its issued shares which I'd assume to be 1 share at £1 unless you're wanting to have a partner on board. If they gave you £5k you could spend it today and liquidate the company tomorrow and they're limited to try and get their money back from the companies assets.

There are plenty of 101 books that will explain the basis and the differences between P&L -v- balance sheet etc

paulwf

PilotDean wrote: »

Firstinflight - it would be for me to get the training and qualifications that I'd need to be able to work.

Would you actually be able to put that expense through the books? It is a genuine question on my part as I don't know the answer but you can't put all types of qualifications through the business. If you could every uni student would set up a Ltd

PilotDean

InsideInsurance, I would have to personally guarantee any loan.

Paul, as I understand it, because I already work in the industry as a pilot, putting further pilot qualifications though the company is fine. Certainly as an employee of other companies the company I've worked for has paid for my ongoing training. Initial qualifications are a different matter though.

Dean

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InsideInsurance

Companies can almost certainly pay for it, whether it is tax deductable and/ or if there is a tax implication for the employee in question is a separate matter.

Mallotum_X

Lets say you get the loan for the training, and you can demonstrate that its a business expense - you need an accountant to sort all this out.

Dividends can only be paid out from company reserves - generally Profits (either earned this year or previously).

The start up costs - if simply training would probably be considered as expenses of the company, in which case you shouldnt be paying out dividends until the company is profitable. technically it would be illegal to pay out as dividends earlier.

However you may be able to argue that the training costs should be capitalised and considered as an asset of the company - possible but probably best not to.

To be honest if you are going to be earning 3k a month then you will only have to wait until month three to take more money anyway, so surely thats worth doing.

You may also want to consider being a sole trader - i.e. self employed, rather than an employee of a limited company. You really should be taking professional advice. As you are already in the industry do you know other self employed pilots? in which case ask them who their accountants are and go see one of them, they will be able to give you the correct advice for the situation.

Regshoe

I'm not entirely certain whether the costs would be allowable or not - ongoing updates and maintaining skills are generally allowable, training that puts you in a position to trade generally are not and you say:

"....it would be for me to get the training and qualifications that I'd need to be able to work"

Which sounds to me like putting you in a position to trade rather than maintaining existing skills. Not absolutely certain on that - worth looking into in more depth I think.

But - forgetting that issue for the moment. You wouldn't actually "pay" yourself the £900 you suggest and shouldn't have an issue getting at the other £2000. Let's also forget for the moment whether you can actually get a £5k bank loan (at the very least you would probably need to personally guarantee it - removing the protection of a Ltd company)

Here is how it should work.

You incur (personally) £5k of costs.

Company is set up.

You claim the £5k in costs from the company - there is no actual money to pay this so the £5k goes into the Director's Loan Account (DLA) (in the companies accounts).

The company takes out a £5k loan (assuming they can and probably personally guaranteed).

At this point you have £5k as an asset in the bank, £5k liability of the outstanding bank loan and £5k liability of the money owed in the DLA. At this point you could pay any amount of the £5k over to yourself and reduce the Directors Loan Account balance by this amount.

Assuming you want to keep some money in the bank for other costs you could transfer £4k to yourself, leaving you with:

£1k Asset of Cash in the Bank
£5k Liability of Outstanding loan
£1k Liability of Oustanding DLA

In the next month you get £3k in (for simplicity's sake lets assume no costs and everything is paid up front - no credit given, lets also assume you haven't yet made your first loan payment). So you have:

£4k Asset of Cash in Bank
£5k Liability of Outstanding loan
£1k Liability of Oustanding DLA

You can now repay the remaining £1k DLA to give you:

£3k Asset of Cash in Bank
£5k Liability of Outstanding loan
£0k Liability of Oustanding DLA

So you have fully repaid yourself.

Although it is correct that you should only take dividends out of profits that doesn't matter in this case, as you can repay the DLA and indeed pay yourself a salary (taking note to keep this at a level where you don't pay tax/NI) and then worry about dividends after this point.

Even after your repay the DLA and take out a salary you can just borrow money from the company via the DLA and then repay this later via a dividend (though you need to aware of the rules regarding benefits in kind here and to keep the amount below the threshold).