Director's Current Account / Director's Remuneration

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datacopy

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General query please to try to get an understanding of the following issue:

A sole trader trading for a few years transfers / incorporates the business into a ltd company (single member co (husband), 2 directors - husband and wife). All of the sole trader’s business assets and liabilities are transferred to the business which results in a surplus of €40k which is posted to a director’s current account. Only 1 share issued – share capital = €1

The company makes a loss of €20k in year 1 after paying directors remuneration of €25k. The director’s current account still has a balance of €40k. The Balance sheet at the end of year 1 will therefore show a deficit of €19,999 - the deficit is essentially financed by the director’s current account but the director’s current account balance is shown in the top part of the balance sheet, therefore the balance sheet will be negative even though the business is in funds. Is my understanding correct in this regard?

If the directors current account balance was transferred / converted to share capital obviously the balance sheet would go back into the black but is there any other way of transferring some or all of the directors current account to “below the line”?

One more question please – would it have made sense for the director to take a salary of say €15k in year 1 and take €10k out of the directors current account to save on PAYE or indeed not to take a salary and just take the money due to him from the directors account? Is there any good reason not to do this, i.e. to take some money out of the business from the directors current account (i.e money that is due to the director) and taking a reduced salary? I assume that it would make sense to take some salary rather than to draw all of his income from the directors account to avail of personal tax reliefs etc?

Thanks in advance for any advice / comments
 
Your assumptions appear to be correct. While being cautious in providing advice where I am not fully aware of the exact circumstances it would be tax effective to withdraw funds from the business by diluting the directors loan rather than by a PAYE salary. The withdrawal would be tax free as it is effectively a repayment of the loan.
 
The most tax efficient way to do it would probably be to just draw enough salary to utilise any tax credits that aren't being used elsewhere (e.g. by self/spouse in a separate employment).

An important issue related to this, and that a lot of people tend not to consider, is that you need to make the decision in real time as to the status of money you draw from your company - if the company has operated PAYE and acknowledged liability on the payments, then you can't subsequently decide that it was actually a loan repayment. The fact that the company (under your direction) deducted tax/PRSI/USC means that it was, is, and must remain, remuneration.

By the same token, if you draw the money out without operation of PAYE, treat it as payment of directors loan, and just do a journal at the year end to classify some / all as remuneration, then you may find yourself exposed to interest on the PAYE that you never paid on the amounts throughout the year...

In other words, tread carefully around this area!
 
1: as a close company from a revenue perspective, as noted earlier u need to be wide awake and squeaky squeaky clean here:)

2: Am puzzled by the accounting here on the initial transfer from ST to Ltd Co
Y1
Current Assets xxx

Current Liabilities
directors loan 40

Net current assets xxx- 40

Liabilities

OSC 1

Y2
Current Assets xxx

Current Liabilities
directors loan 40

Net current assets xxx- 40

Liabilities

OSC 1

Retained losses 20

Net (19,999)

so how do you make the Net assets the same
 
Thanks Hastalavista

Just to clarify - the opening director's account is the difference between the assets and liabilities - i.e. assets being transferred from the sole trade exceeded liabilities by €40k - the difference of €40k was posted to a directors (current / loan) account.

Does this make sense

Thanks again
 
So in simple terms say the only entry was the 40 in cash

so at the start

Dr Bank 40

Cr Dir Loans Account 40

Dr Bank 1

OSC 1

-----

Assets 40k + 1

Long term Liabs
Dir Loan 40k
OSC 1


or
Net Assets 1
OSC 1

:)

So then

after 20k losses

Assets 20k +1

Long Term Liabs
Dir L 40k
OSC 1
P&L (20k)

or
net liabilities (19,999)
OSC + L (19,999)

:(

The entity is insolvent so if audited would need a statement to say what steps were being taken to sort it.

You could convert the 40k into some form of pref shares or OSC but there are stamp duty costs
 
Or you could just draw money against the dir's loan instead of the salary during the year, to the point where you'd have a pretty much breakeven or v small profit situation...
 
Thanks again hastalavista

Given that the entity is insolvent, would it be better, for the purpose of trying to get back to solvency if the director withdrew monies (for living expenses etc) by redeeming some of the directors loan rather than by paying himself a salary in the current year (assuming that he continues to trade) as redeeming some of the director's loan would reduce the company liabilities thus having a positive effective on the balance sheet whereas paying himself a salary would reduce company profits (and would also attract a PAYE liability) thus having a negative effect on the balance sheet.
 
There is no problem per se with the company being technically insolvent, where the only substantial creditor is the director's loan - trading while insolvent is only a problem if you are recklessly trading i.e. jeopardising your trade creditors / providers of finance...

Certainly there is a S.40/S.41(?) issue that requires a note in the balance sheet, convening of an imaginary EGM etc... but that is only company law compliance stuff.

What I'm trying to get at, is that you need to consider why you require the company to be solvent - if it's for the bank to continue facilities, or to avoid exposing yourself to being held personally liable in the event of a winding up, then you need to get it sorted. But if it's merely because you have an aversion in principle to the negative balance sheet, you need not necessarily be sweating over it. (Circumstances are everything: Before anyone jumps on me, I am NOT advocating that it is generally OK to trade while insolvent!)
 
mandelbrot said:
There is no problem per se with the company being technically insolvent, where the only substantial creditor is the director's loan - trading while insolvent is only a problem if you are recklessly trading i.e. jeopardising your trade creditors / providers of finance...

Certainly there is a S.40/S.41(?) issue that requires a note in the balance sheet, convening of an imaginary EGM etc... but that is only company law compliance stuff.

What I'm trying to get at, is that you need to consider why you require the company to be solvent - if it's for the bank to continue facilities, or to avoid exposing yourself to being held personally liable in the event of a winding up, then you need to get it sorted. But if it's merely because you have an aversion in principle to the negative balance sheet, you need not necessarily be sweating over it. (Circumstances are everything: Before anyone jumps on me, I am NOT advocating that it is generally OK to trade while insolvent!)
Click to expand...

The compliance issue, if there is one, should be addressed as you don't need the CRO or worse the ODCE crawling around for something like this.

As both entities are short of mula, they will be quick to impose whatever fines they can, especially the ODCE while we wait ten years to find out what they make of Seani and Friends:(


The CRO filing will tell a lot here
 
hastalavista said:
The compliance issue, if there is one, should be addressed as you don't need the CRO or worse the ODCE crawling around for something like this.

As both entities are short of mula, they will be quick to impose whatever fines they can, especially the ODCE while we wait ten years to find out what they make of Seani and Friends:(

The CRO filing will tell a lot here
Click to expand...

I'm not sure exactly what you mean above - the compliance issue here as regards the CRO / company law, is that the company is required to make the proper note on the balance sheet acknowledging the issue, and confirm an EGM etc took place where the members were made aware by the members that the company's net assets had fallen below half the value of the issued share capital, bla, bla, bla. This is all merely a paperwork exercise in the case of a single member owner managed company.

My point to the OP is that as long as they DO COMPLY with these not very onerous requirements, the CRO / ODCE have nothing to take issue with, and as long as they aren't exposing other parties financially, i.e. banks / trade creditors, then there isn't really an issue with the company trading insolvently for a period, unless he plans to take his own company to court over an unrecoverable director's loan... :D
 
mandelbrot, no issue with any of this, the point I was trying to make is that in the current climate of shortage of cash in publicly funded entities there is a drive to collect as much mula as possible, very evident in LA's in relation to minor planning infringements that were fine during the boom: boundary walls too high, by a block, extensions too close to boundary wall, by 100-mm, driveways widened by 250-mm etc

I see the same across the public service: so just let the OP do the paperwork and don't be raising his head above the parapet in any way.

Keep well.
 
You've misunderstood me Hastalavista - I've never suggested to the OP that he can / should stick his head above the parapet; quite the opposite. I merely suggested that for a small company as described, compliance is an easy paperwork exercise, but one that must be done; and is ultimately irrelevant to his decision whether or not to allow the company trade while insolvent. The real risk being his responsibility to his other creditors.
 
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