Starting an LTD from being Sole Trader & Directors Loan

[Ben Anderson]

I have set up a new LTD company and will be transferring clients and suppliers to the new company from being sole trading. Once my business bank account has been set up, I am probably going to provide a directors loan from my personal account, I currently operate my sole trader accounts on.

Due to being a new LTD business (have been sole trading for 4-5 years) it's probably going to be hard or impossible getting access to overdrafts and loans if needed just for a cash boost at the start. I currently have a good personal credit score and my Virgin Credit Card is offering a credit card to current account transfer of money (bit like a personal loan) at 4% for 1k (just need a little extra cash to ensure I have space to breathe while moving to ltd and don't want the business bank account going into the red at start).

Basically I would need to provide Virgin with an account number/sort code, to send the funds to (so would either need to choose to send directly to Business Bank Account or to go to a personal account and then business account.

Just want to make sure that either of these is legal (preferably would like to do the direct personal credit card to business account option, to keep things simpler as a directers loan). I was then going to do a 2nd directers loan from the funds in my personal account to the business account?

Thanks for your advice, this is all new to me! As have only ever operated as a sole trader.

 

[Ben Anderson]

Just to also clarify it would be at 4% for 1 Year, just a one-off service charge on what I borrow from the credit card.

 

[dotcomdude]

There’s nothing illegal about you lending money to your new limited company, whether that comes from your own funds or a draw-down on your personal credit card.

Whether it’s wise to borrow on a personal credit card to fund your company is something only you can answer really. Hopefully you are certain that the company can easily pay it back within the required timescale.

 

[Mr D]

Just be aware that despite plans you may be unable to pay the advance off quickly.

Your directors loan account can pay you back tax free however you may not have enough spare on hand to do that.
Lots of people have borrowed on personal credit cards for business fully intending to pay back. And been left holding the debt when business gets into trouble or folds.

You may be certain yours will not have that problem. Many of those in trouble were also certain at the time.

 

[MyAccountantOnline]

..... I would need to provide Virgin with an account number/sort code, to send the funds to (so would either need to choose to send directly to Business Bank Account or to go to a personal account and then business account.

Just want to make sure that either of these is legal (preferably would like to do the direct personal credit card to business account option, to keep things simpler as a directers loan). I was then going to do a 2nd directers loan from the funds in my personal account to the business account?

.....

Yes from an accounting and tax view point that's fine.

You don't need to split it as 2 loans you just show all monies you've lent the company as a directors loan.

If you pass on the finance charge or charge the company interest for monies you lend it don't forget that needs to be declared on your personal Self Assessment tax return.

As a thought has the company purchased anything from you personally eg goodwill, any equipment used by your former sole trade etc.?

 

[Ben Anderson]

I was also thinking of maybe keeping my expenses on my personal account for just a month and having my income go into the new business bank account and switch all the suppliers over once my first lot of payments are in from my customers. My customers mostly pay me monthly on direct debits set up to me through GoCardless and come in at all different times during the month.

The only issue is that might make things a bit messy. The problem I have is I need expenses and income to align, which is going to be hard during the first month. If more expenses come out before the first lot of DD's get to me, that will be when the issue arises - so I need to make sure there's enough capital in both accounts during the transition.

With a directers loan, with no interest. Can you make the terms whatever you want eg. 24 months if needed.

 

[Chris Ashdown]

What is your reason for going limited, as it sound like your running a very low cost trading as business at present

 

[Mr D]

With a directers loan, with no interest. Can you make the terms whatever you want eg. 24 months if needed.

Its not quite like that.

You pay personal money into the company / buy something personally for the company.
You then credit your directors loan account.

Later on - perhaps many months down the line - the business has cash in the bank spare and you decide to take some money out for personal use.
You then debit your directors loan account by that much - and if merely taking out money you have already put in then its not taxable.

 

[Ben Anderson]

What is your reason for going limited, as it sound like your running a very low cost trading as business at present

Mainly due to larger clients, who sometimes won't use us due to just being sole trading. It just looks unprofessional. Also wanting to get the liability off me.

I have invested quite a bit of the pot of cash I had into marketing for business, ready for 2020. I feel we are now ready as I have tried and tested my business idea, the formula we use now seems to work well and making the transition now seemed right.

 

[Ben Anderson]

Well, thanks for all your help so far, it is much appreciated - especially being new to all this.

I have been told quite a few different things regarding the Directors Loan account. So if I was to put in let's say for example 2k of my personal funds into the business. Would I need to write a formal document out to state what I'm doing? Is it a requirement to put the length of time to pay the money back to my personal account, or do I have the flexibility to pay the funds back when I want?

Using a personal credit card with a cash transfer deal is not ideal and is something I want to avoid. As a backup solution if I need funds quick to help start me off as Ltd. Would it be best to transfer those funds to my personal bank account and then to my business and do one directors loan which includes both my money and the credit cards? That will also solve getting involved with having interest on the director's loan. Would I just need to claim the funds I receive from the credit card on my self-assessment, as it's going into my personal bank account?

 

[Scalloway]

Would I need to write a formal document out to state what I'm doing? Is it a requirement to put the length of time to pay the money back to my personal account, or do I have the flexibility to pay the funds back when I want?

It does no harm to have it documented to make things easier for your accountant. You can pay the funds back at any time you want.

Would I just need to claim the funds I receive from the credit card on my self-assessment, as it's going into my personal bank account?

You only need to put any interest you are charging the company on your self assessment. Mere movement of personal funds has no tax consequences.

 

[MyAccountantOnline]

.... Would I need to write a formal document out to state what I'm doing?
...

No but keep a full record of what you've done and where the money has come from in case HMRC ask at some point in the future. Make sure the funds are shown as a directors loan in your company accounting records.

.... Is it a requirement to put the length of time to pay the money back to my personal account
...

No

.... do I have the flexibility to pay the funds back when I want?
...

Yes

.... Would it be best to transfer those funds to my personal bank account and then to my business and do one directors loan which includes both my money and the credit cards? ...

It doesn't matter from an accounting and tax point of view - if it makes it easier for you that way it's fine