A Directors Loan Account (DLA) is a virtual company account which records all money that has been borrowed from or loaned to a company by its directors. They are often set up when a business is starting up to cover any initial expenses which are not salary, dividend or expense reimbursement recorded in your accounting records.
Directors Loan Accounts can be in credit or in debt. If the account is in credit, then your company owes you (the Director) money and if it is in debt, then you (as Director) owe your company money.
It is very important that all transactions are recorded in case HMRC ask to review your Directors Loan Account to check the amount of Corporation Tax the firm should be paying.
If the loan exceeds £5,000 it will be treated as a benefit in kind. If you only manage to pay back part of the loan before the 9 months of your business’ year-end, then you’ll have to pay tax on the outstanding balance.
In the case of having more than one company director, each director must have a separate record of their transfers.
It should be noted that if too much money is borrowed, leaving the company unable to repay its creditors, it is possible that the company could be forced into liquidation. The liquidator may then choose to take legal action against the director in order to reinforce the debts. In some cases, the liquidator can even make the director bankrupt.
If you are looking to either provide your business with a Directors Loan or use your business to provide yourself with a Directors Loan, we can help you draft it up.
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Disclaimer:
This blog is intended to give general information and does not constitute legal advice. Should you require legal advice please contact us.