What to do with company profits

chappers

silvercar wrote: »

I don't think this is true. I would have expected business earnings of a limited company to be paid into an account in the name of the business. Unless the names were very similar, I doubt a bank would accept a business cheque being paid into a personal account.

Thats if they bother checking I was told by my actual bank that i could take my chance paying a check made out to me into my Ltd company's account, as they very rarely checked the name on the account the cheque was being paid into.

CannyJock

jaype wrote: »

Ours is a limited company. Given the wobbles in the banking system, I'm a bit shocked that the IR would want us to keep all the profits from the business that we haven't drawn down so far in a single bank account. As long as we're not spending it, can't we just put it in units of 35k in various accounts or bonds in the joint names of the two directors? Couldn't the interest then be reinvested and remain part of the profits until drawn down? Help much appreciated.

If it's a limited company then the money received is in the company's own name - if you have it in a personal account (even if you're directors) then you need to account for it.

I had a similiar situation when I incorporated from being a sole-trader, few payments when into sole-trader account and was transferred across, but was fully accounted for.

Interest on personal accounts is MUCH higher than business accounts and many personal accounts specify in their terms and conditions that it can't be used for business purposes.

Technically, and hopefully someone can correct me if I'm wrong, the money that's in the personal accounts would be treated as a loan, and unless you charge yourself interest around the 6% per annum mark, would be classed as a beneficial loan.

Otherwise, the money you've taken out would be treated as a net of tax payment and the tax has to be accounted for by the company. It's a dilemma for sure - is why this thread is such an interesting read

How have you accounted for the money at the moment?

danwednesday

This has turned out to be an interesting thread for sure - to summarise, it seems people (not just myself) are unsure as to the most tax efficient way to withdraw funds from a small limited company. The options seem to be to keep the money in the company, withdraw and declare it as a combination of PAYE and dividends, invest it in a pension, or try to play the system by taking loans etc from the company and accruing interest before paying them back, making damn sure it's all done properly and well within the law.

Now it's just a case of finding a decent accountant who knows for sure what the most efficient method is, and can explain it in terms I can understand.

silvercar

I agree with your options list, the solution will be different for different people depending on the business growth and individuals circumstances.

If you can manage without (all) the money and you are nearing retirement or the business will wind down, you can wait a few years and then take out enough to utilise your basic rate tax allowance each year (so dividends + PAYE of about 34k).

If you need the money or your business has a lot of profits and will do so in the future, you need to get the money out and may have to take a hit on the tax.

Pension option works if you can afford not to access the money until you retire. A pension mortgage may be an option here.

I'm not sure of the legality of taking loans then returning them every year. Each year the amount you take will grow. I imagine suspicians may be raised if you take out half a million and return it 9 months later.

Pleasant problem to have though.

jaype

Spoke to my accountant about it this morning - at the moment, the funds are in a savings account in the name of one of the directors. This isn't used for any other purpose bar collecting the monthly payment from the transaction handler who deals with all our sales. According to the advice I've received, the money CAN be put into fixed rate bonds or separate accounts, as long as it's not mixed with any personal money or similar. Seems sensible, otherwise HMRC would be condemning businesses to taking banking risk despite the FSA warning individuals not to hold more than 35k with any institution in case it 'did a Rock'. Still doesn't help with the issue of withdrawing profits, though I suppose 32.5 percent tax is marginally better than 40 per cent. Looks like we're all going to have to take the hit or hold out for a conservative government, which is inevitable given the current lot's problems. I don't look forward to this in any way bar the fact that as a small business there will probably be some tax benefits, surely...

stphnstevey

Just marking this interesting thread for reference