What is a Director’s Loan Account (DLA)?
Every director who takes money from, or lends money to, their company needs to keep a record of these transactions. This record is called a director’s loan account. It ensures transparency and helps with tax calculations for both the company and the director.
What goes into a Director’s Loan Account?
- Director’s Drawings: This is money a director takes out of the company for personal use, similar to a salary but not classified as such.
- Company Expenses Paid by Director: Ideally, personal and business expenses should be kept separate. However, if a director uses their own money for company purposes (e.g., travel), it’s recorded here.
- Director’s Investment: Any money the director puts into the company, above their initial investment, is recorded in the DLA.
- Unpaid dividends: Dividends, which are profit shares distributed to shareholders, can also be reflected in the DLA when there are not immediately taken
Understanding Your DLA Balance
- Credit Balance: If you’ve invested more in the company than you’ve taken out (drawings, expenses), the DLA shows a credit balance. This means the company owes you money.
- Debit Balance (Overdrawn): If you’ve taken out more money than your dividends and investments, the DLA is in debit, meaning you owe money to the company. This debt needs to be repaid eventually.
Important Considerations:
- Tax Implications: There may be tax implications for both the company and director depending on the nature and amount of transactions in the DLA. Consulting a tax advisor is recommended.
- Interest on DLA: In some cases, interest may be charged on director loans, impacting the final balance.
- Repayment of DLA: An overdrawn DLA needs to be repaid to the company. This is crucial during liquidation to avoid legal issues.
Maintaining a Healthy DLA
- Clear Separation: Distinguish between personal and company finances. Avoid using company funds for personal expenses.
- Regular Reconciliation: Regularly review and reconcile your DLA to ensure accuracy and avoid potential tax issues.
- Professional Advice: For complex situations, consult with an accountant or tax advisor to ensure proper management of your DLA.
By understanding your director’s loan account and maintaining it effectively, you can ensure financial transparency and avoid unnecessary tax burdens for both yourself and your company.