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Getting it right as a Director: 8 useful tips for Owner-Managed businesses
When clients are managing their own business, the focus is, understandably, often on the day job. At Leonard Curtis we have over 30 years of experience supporting business owners and have often seen owner managers who need additional support.
Here to help you help your clients, we’ve summarised some key tips to help keep business on track.
1. Dividends and Directors’ Loan Accounts (DLAs)
Many directors of owner-managed businesses prefer to take their remuneration as dividends rather than salary because it can be more tax-efficient. However, dividends can only be paid out of company profits. If a company is not profitable and has no available reserves, any dividends taken are illegal under the Companies Act. In an insolvency scenario, those dividends will have to be repaid.
If any money drawn from the business is classified as their overdrawn Director’s Loan, it is still a company asset and must be repaid to the company.
It is important that directors and shareholders are keeping accurate and up to date account of their books, to ensure the business is making enough profit for dividends to be paid.
The alternative is to take remuneration via PAYE, which carries a higher tax and National Insurance burden for the company but avoids the risk of repaying a dividend or DLA in an insolvency situation.
2. Keeping Adequate Books and Records
Up-to-date and accurate books are essential, not only to meet compliance requirements but also to demonstrate you undertaking your statutory duties as a director. Records can illustrate when the company was solvent, justify dividend payments at that time, and evidence major decisions (such as moving from dividends to salary). Keeping written notes of why decisions were made can make a significant difference if the company’s affairs are scrutinised later.
3. Using the Company Account for Personal Spending
Directors should never treat the company’s bank account as a personal one. Even in sole-owned businesses, spending company funds on personal items such as food, fuel or any other miscellaneous payment, is not a legitimate business expense. These payments are classed as DLA transactions. If the company later enters a formal insolvency process, any overdrawn DLA balance must be repaid.
4. Preference Payments to Directors
It is common for directors to invest personal money into their company to support the business. Often this cash injection is accounted for as a DLA transaction. However, problems arise if their loan is repaid to them just before the company enters a formal insolvency. For example, if a director has lent £25,000 to their company and withdraws £25,000 of company funds shortly before liquidation, leaving nothing for other creditors, this repayment will be investigated. Such transactions can be challenged by liquidators and result in the director needing to repay any loans to the company.
5.The Risks of Personal Guarantees
Finance obtained in the business with the director being required to sign a personal guarantee (PG) leaves directors personally liable if the company fails and cannot repay the debt. Any shortfall falls directly on the director as guarantor of the debt. It is advisable for any company director to take professional advice before signing a PG, to fully understand the potential personal risk if things do not go to plan.
6. HMRC liabilities
HMRC will pursue late returns and any unpaid liabilities. Staying up to date with tax filings and payments not only avoids potential interest, penalties and pressure from HMRC but also allows directors to identify potential insolvency risk earlier. Accurate company records again play a vital role here.
If a business is struggling with HMRC liabilities our dedicated team at Leonard Curtis have a longstanding reputation and strong track record in restructuring HMRC arrears over a sensible time scale.
7. Safeguarding customer funds
Where a business takes upfront deposits, such as a 50% payment for goods, these funds should ideally be safeguarded in a separate bank account until the order has been completed successfully. Using customer deposits as general cashflow creates risk: if the company becomes insolvent before fulfilling orders, customers may lose their money, and directors are likely to face criticism.
8. Undervaluing assets
While it is possible to start a new company after one enters a formal insolvency process, directors must be careful when transferring assets. Moving assets from an insolvent company to a new one at no cost, or below market value, will be investigated. For example, transferring a van worth £10,000 to the new company without payment would require the appointed insolvency practitioner to recover the missing £10,000 from the new company or the director personally.
All of the above can result in a director being disqualified from acting as a company director in the future.
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Leonard Curtis is a trading style of Reach Commercial Finance Limited, registered at Riverside House, Irwell Street, Manchester, M3 5EN. Company Register number is 09056450. Reach Commercial Finance Limited is authorised and regulated by the Financial Conduct Authority, FRN: 753686. Reach Commercial Finance Limited is an authorised credit broker and not a lender. We work with a an unrestricted number of lenders to find a potentially suitable arrangement for your consideration. ICO registration ZA069234 and you can check via www.ico.org.uk. We will receive commission from lenders. Different lenders pay different amounts depending on different commission models. For transparency we work with the following commission models: fixed fee, fixed rate of commission, percentage of the amount you borrow and rate for risk (this is based on the risk profile of the business). Further details of the commission model, calculation and amount will be disclosed to you throughout your customer journey. Privacy notice.
Leonard Curtis Legal Limited is a limited company, registered in England and Wales with registered number 09820186. Registered office: Riverside House, Irwell Street, Manchester M3 5EN. Leonard Curtis Legal Limited is registered with the Solicitors Regulation Authority with number 626004.