The common pitfalls for directors of Limited Companies – and how to avoid them

So you’ve registered with Companies House, paid the £13 fee and have your model articles of association and share capital holdings published on their website. Simple, right? Do you even need an accountant given that it was that straightforward to get started?

This is where I can see clients being led astray. It’s simple to register for a limited company but – when it comes to running one correctly in terms of accounting and tax – you can trip up.

I wanted to start with an area which catches directors out- time and time again – and that’s taking money out of a limited company.

When you are a sole-trader – your money and the businesses’ money are one of the same (mi casa tu casa – tomatoe tomata – you get my drift?) so – once you earn that money – its yours.

When you have a company – the money in the company’s bank account belongs to the company – which is separate to you as the owner and/or director.

You have to follow a different set of rules to get that money out correctly – making sure your paperwork and tax compliance is all stacking up at the same time.

Ultimately – if you are taking money out of a limited company – the most common ways to do correctly is via:

1) Salary

2) Dividends

3) Director’s Loan

What I have seen is directors taking money out of the company throughout the year and then – at the end of year – the accountant works back – retrospectively “fitting” payments made to Directors into one of the above categories.

The result?

  • A bit of a year-end scrabble
  • The client misses out on a well-thought out tax structuring strategy set at the start of trading
  • Missed reporting deadlines for payroll submissions to HMRC
  • Falling foul of the rules around Director’s Loans
  • Illegal dividends being taken
  • A backlog of paper work having to be completed (such as dividend vouchers) to get up to date with what has been paid – in the event of a HMRC inspection

So what is the solution?

When speaking to an accountant – make sure that they can give you guidance on the best way of taking money out of a company – ideally before you start trading.

You should be able to discuss the benefits of operating a monthly payroll vs taking dividends only.

They should also be able to assist you with dividend templates and potentially assist you in registering as employer for PAYE if necessary.

There are a lot of accountants out there who offer a range of services – make sure you are getting the right level of information to meet what your business needs.

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