Can I loan personal money to my limited company?

Loans between contractors and their business are not without issue but the short answer to the often-asked question of whether you, a contractor-director, can lend your own personal money to your limited company is ‘yes’ -- you can, writes Gareth Wilcox, partner at Opus Business Advisory Group.

Since a company is a separate legal entity, it can hold assets and money in its own name.  Accordingly, it is important for contractors to recognise that whenever there is a transfer of funds in either direction, this is a transaction which needs to be recorded by both the director/shareholder and in the company’s own records. 

Don’t do what I’ve seen several contractors do…

One of the easiest ways to do this is to make sure that any and all limited companies have their own bank account, so you can rely on the statements generated in the name of the company.  While this sounds like a basic point, I have come across several situations where this has not been done, which can cause substantial issues further down the line given the need for company funds to be treated separately from the contractor’s personal affairs.

Where you transfer funds to your limited company (e.g. providing start-up funds to pay for a web domain on incorporation),you may not give it much thought. But you are inevitably granting it your limited company a loan which (in most instances) you will want to be repaid at some point – notably when your business starts making money. 

You should also ensure that any liabilities are recorded in the company’s accounts, to avoid any misstating of its financial position, and to ensure that when you are repaid there is no ambiguity that the amounts are validly due to you as a loan, and do not represent another form of payment such as a shareholder dividend.

Should contractors charge interest when loaning cash to their company?

You do not need to charge interest on funds which you loan to your company, and it will not pay corporation tax on any funds advanced since they are not a profit. 

If you do choose to charge interest, you will need to ensure that you account for this as personal income, and it will represent a business expense for your company.

What paperwork or processes do contractors need to loan money to their own limited company?

The most obvious situation is where the company doesn’t have the funds to meet liabilities itself, such as on start-up or in the event of unforeseen expenditure or financial difficulty.  Alternatively, you may wish to make an investment in certain assets to support growth.

When considering loaning money to the company, you should consider carefully when and if it is likely to be able to repay the funds to you. Similarly, you should consider drawing up a ‘formal agreement’ detailing the timing of the loan, rationale for it being taken out, and the structure of the repayment terms. 

While the above may seem excessive, there is no priority right for funds introduced by directors/shareholders to be repaid prior to other creditors, and (in the absence of security being granted), it will represent an unsecured claim against the company. 

Worse, in the event of an insolvency scenario, a liquidator may seek to ‘claw back’ repayments made to a director who has taken self-help in the period leading up to a liquidation. Having both a loan agreement and structured repayments may assist in the event of questions being asked in the future about the repayments made.

What alternatives are there to loaning my company my own money?

The most obvious alternative is for someone else, such as a bank to lend the money, although clearly this will only be possible based on a commercial rate of interest, and in many contractor scenarios, lenders will require a personal guarantee. This means the director is personally exposed for the company’s liability in any event, so often contractors will take the view that they may as well lend the monies themselves.

Another alternative is to introduce funding in exchange for share capital. This will mean that the funds introduced will not appear as a liability on the balance sheet (improving the solvency position). The downside to this, however, is that funds due to shareholders can only be repaid if there are sufficient reserves for all liabilities to be paid, so effectively funds introduced in this way will rank below any ordinary liabilities, e.g. supplier payments, and tax.

What if the company cannot afford to repay me?

As stated above, there is no automatic right for directors/shareholders to be repaid monies that are owing to them. 

In the event of the company being insolvent, the funds will rank ‘pari-passu’ (i.e. equally) alongside other ordinary unsecured creditors. These claims will rank behind any secured creditors, as well as those which hold preferential status in law.

Final thought

While it is perfectly possible for a director to loan monies to their company, such contractors should ensure that all terms are documented in case of retrospective review. 

Tuesday 4th Oct 2022
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Written by Gareth Wilcox

Gareth Wilcox is a Partner and Licensed Insolvency Practitioner with Opus Restructuring & Insolvency.  As well as heading up Opus’ Birmingham office, he oversees the solvent restructuring team and has significant experience in this area

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