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A company’s director can withdraw money from the company for personal use. The withdrawn money is recorded under the director’s loan account. At the end of the year, these drawings need to be reconciled and paid—failing which, the director enters into deep trouble. Keep reading to know about what happens when the director’s loan account is in debt.
Know what happens to overdrawn director’s loan account
You must be aware of simple terms like debit, which means to withdraw money from the account. So, when there is an overdrawn director’s loan account, that means the director has debited the money out of the account and is now liable to pay it back. This is a common process as the director may need other than their salary or dividend. So, this withdrawal becomes a loan for the director that they have to pay back at the end of the financial year to keep the account back into a positive position. When a company makes a profit and pays off its corporation tax before it allocates its dividends, everything stays right on track. In case a business struggles to gain profit and is unable to pay the dividends to the shareholders, the director is held liable to the organization as the director’s loan account will be reflected overdrawn.
Problems related with overdrawn director’s loan account
When the time period has crossed to pay the overdrawn debt, the director is bound with an insolvency tag. Now, that’s a serious sign. The outstanding amount is now handled by the appointed liquidator. Some of the common circumstances that one can do to settle the overdrawn director’s loan account are mentioned below:
- May pay the full directors’ loan debt over time.
- Can set off the director’s loan if made to the company.
- May take the salary of the director only after reducing the amount withdrawn from the business to offset the loan.
- Aim for higher profits so that the organization is able to pay the dividend to the shareholders.
If there is still no settlement of the debt, there are problems that the director has to go through.
Tax penalty
After an accounting period has finished, a certain time period is offered to the director to settle the overdrawn account and pay off the corporate taxes. It is about nine months after the completion of the accounting period. If he or she is still unable to pay off the debts, then the government has the right to put a corporation tax penalty on the organization. A limited company will incur a tax penalty of 32.5 percent of the total loan amount. The corporation tax penalty can be paid off by seeking a person’s personal property.
Legal actions
In the end, when the debtors become insolvent, legal actions can be taken by the financial institutions. Similarly, when the director’s loan account is in debt, then there will be legal action, which is undoubtedly serious. A hired liquidator will ensure to get the money from the director so pit can include the possession of the personal property.
To avoid these consequences, you must repay the debts on time, i.e., by the end of the financial year.
