Withdrawing money from a limited company

Unlike sole traders where withdrawing money from the business is a relatively straightforward process, withdrawing money from a limited company is a different matter altogether.

Simply put, a Director’s Loan Account (DLA) is a record of financial transactions between the company and the director.

Overdrawn DLA

Having an overdrawn DLA isn’t the end of the world, particularly if you keep track of the money owed and you can afford to repay it.

Overdrawn DLA in liquidation and administration

In insolvency, as part of their statutory duties, a liquidator or administrator will look into whether the DLA is overdrawn.

In addition, an overdrawn DLA can starve the company of cashflow which may impact on its ability to pay creditors on time.

Writing off an overdrawn DLA

If the company has previously ‘written off’ the DLA, depending on the specific circumstances a liquidator or administrator may seek to challenge the transaction if the company has received nothing of value in return for writing the loan off.

Any amount of the DLA that is ‘written off’ by the company may be treated as income, dividend or a personal benefit of the director. HMRC may seek to recover income tax from the director who benefited from the write off. In both potential scenarios explained, should a director be unable to settle the overdrawn DLA, then this may result in the director being made bankrupt.