The step up from running your start-up in your own name to that of a company is not a small step. You take on extra responsibilities and all of a sudden, things are taken out of your name and are in the name of your company. So what happens when you put money into your company and want to take it out. Do you have any responsibilities there?
We often see start-ups substitute their business bank account for the personal bank account. We ask why and they generally respond with “but it is my company, and my money”. We agree. But things aren’t as simple as just taking money out when you want. Why?
Let’s look at it two ways. When you put money into the business, you are either buying shares in the business or lending money to it. That’s the easier part. If you lend money to the business, you can take this money out tax free as ultimately, it is still your money, not the company’s. You can also take out money in the form of directors fees, a salary (ultimately the same as Directors fees) or as a dividend payment. All are treated a bit differently so it pays to know what to do when. Also be careful not to take out too much money from the company that you now owe the company money, not the other way around. This generally happens when the company is profitable so is in effect, a payment of the company’s profits. It makes things a bit messy and you don’t want to make yourself a target with the tax office.
There is plenty to talk about this but some simple tips to guide you through these issues are:
- Separate business and personal expenses to help track your businesses performance more effectively. Buying dinner, clothes etc doesn’t help you track how your business is performing and just makes things messy. To grow your business, you need to be disciplined and that includes the way you manage your businesses finances.
- Be clear about what is the company’s and what is yours. If you want to transfer money from the company to yourself, great! But make sure you have thought about how this payment will be structured to avoid any tax troubles (see above). If unsure, chat to your accountant to give you a bit of guidance around this.
- If taking money out, don’t listen to anyone telling you that a Director of a company can also be a company contractor. Why? A Director of a company should be acting for the benefit of the company. A contractor is someone independent of the company. The two just aren’t compatible. As with the above point, chat to someone that knows to avoid any tax troubles.
- If you own the company with someone else, always make sure you are completely transparent with any money you take out. It can avoid a whole lot of issues.
Emma Petroulas is Client Happiness Director at Nudge Accounting. She also lectures in Small Business at the University of Technology, Sydney (UTS).