Every business owner needs to take cash out of the business at some point. But if you’ve just moved from being a sole trader to a limited company, you may get caught out by the different rules around withdrawing cash from the company.
When you’re a sole trader, you and your business are one and the same legal entity. So taking cash out is a simple procedure. But as the director and shareholder of a limited company, you and your business are two separate entities – and that means that money in the business is no longer your personal money. It’s money that belongs to the limited company.
Regardless of which way you operate, you should always have separate business and personal bank accounts. The business account should be used to deposit all funds from sales and other business income, and to pay for purchases and other business running costs.
As a sole trader, there’s no legal difference between your personal and business funds. The main reason for a separate personal bank account is to keep your personal expenses separate from your business expenses. So, rather than mixing up things like mortgage or house rental payments, groceries and household bills with your business expenses, you have two distinct accounts – one personal, one business.
If you need money for personal expenses, you just transfer it from the business account to your personal account – it’s all yours to do what you want with. Obviously, you need to leave enough in the kitty to pay suppliers when their bills become due. But, as a sole trader, there’s nothing to stop you draining the business account completely, if you want to.
For a limited company, it’s a legal requirement to have a separate business bank account. Even if you own the company 100%, the money in the company bank account belongs to the company, it does not belong to you.
There are four ways of taking money out of the limited company, and in each case you should do it by transferring funds from the company account to your personal account. Preferably you should make these separate transfers, even if they happen on the same day.
Withdrawing funds from your company for personal use takes some serious thought and planning. If not, you may well end up with an unintended overdrawn director’s loan account.
It’s important to remember that the company’s funds are not yours in the same way that a sole trader owns the funds in their business account. Getting professional advice as a director is the best way to manage your cash withdrawals from the business.
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