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Running a company through a personal account

Running a company through a personal account

I have just taken on a client and am about to prepare the first set of accounts.

I notice what they have done is used a personal account that they have had for a while to run the company from - it doesn't seem that this is actually illegal, but surely it's not good practice?

I have also noticed a couple of statements missing so have asked the client for these - and they seem to be quite evasive about giving the missing ones to me?

I would add that the client has paid me in full for the accounts upfront - in this situation what would you do?

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15th Jun 2013 15:20

Director's loan

I treat the money in the account as a director's loan and recommend they open a company bank account. I know some people say the money is held on trust for the company.

Ask for the statements until you get them.

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By kfatax
19th Jun 2013 11:41

Director's loan

I would also ask the client to confirm in writing that the company has not had a bank account at any time during the period in question.

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15th Jun 2013 15:28

Same as Peter

Explain to the client the importance of 'getting things right', and the consequences of getting it wrong (eg. overdrawn DLA).

Make sure you get the statements. At worst it will cost them a few £ for the bank to send duplicates. If they never appear, then the accounts can't be done (and I would keep the fee), but make sure you have plenty of proof that you repeatedly asked for them and warned they are essential for prep of the accounts.

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15th Jun 2013 15:56

Agreement

I got an agreement from HMRC that a director held money in  an account in her own name, rather than the company's, BUT it was a savings account, not a current account, and there were conditions - mainly that there were only transfers to and from the current account.

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15th Jun 2013 19:13

Does the client have a bad credit rating and is not able to get a company account?

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By hiu612
19th Jun 2013 11:09

P11d

A seasonal thought. Do they have a dispensation in place relieving them of the need to report their expenses claims (which presumably represents all expenditure flowing through the personal account)  and from lodging a corresponding s.336 claim? Administrative headaches like this may help encourage them to 'do it right'?

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19th Jun 2013 12:07

By the same logic

hiu612 wrote:

A seasonal thought. Do they have a dispensation in place relieving them of the need to report their expenses claims (which presumably represents all expenditure flowing through the personal account)  and from lodging a corresponding s.336 claim? Administrative headaches like this may help encourage them to 'do it right'?

By the same logic, are you saying that entirety of the company's turnover should be subject to PAYE and NI because it is deposited in the directors' personal account?

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By hiu612
19th Jun 2013 11:09

P11d

A seasonal thought. Do they have a dispensation in place relieving them of the need to report their expenses claims (which presumably represents all expenditure flowing through the personal account)  and from lodging a corresponding s.336 claim? Administrative headaches like this may help encourage them to 'do it right'?

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19th Jun 2013 11:36

Is it me?
Surely that's fraudulent(SOCA etc...)? The funds belong to the company, not the individual, no?

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19th Jun 2013 13:53

No

It's not fraudulent to bank the company's money in a personal account. There has to be an intention to deprive the company permanently of the funds. Hard to prove either way - but I'd reckon that running the entire business through a personal account points generally in the opposite direction.

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19th Jun 2013 11:45

Duty to promote the success of the company

If it's a 12 invoice a year IR35 type contractor, fine, but surely with anything more complicated, matters are going to get hopelessly entangled, and the director isn't upholding his duty to promote the success of the of the company and keep accounting records.

Don't see the money laundering issue, though, as I don't see any quantifiable financial gain.

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19th Jun 2013 12:13

SOCA

Surely there doesn't need to be a "quantifiable financial gain" for there to be an MLR issue?   W" for there to be a MLR issue?"  In any case, what if he has a flexible mortgage    v                    

In any case, what if he has a flexible mortgage?  Every time he deflects company money, he benefits.  There are then possible breaches of PAYE rules and/or the company is "paying out" dividends greater than tha post-tax profit.  (I am aware that's not illegal but it is unlawful.)  There is also a loan-to-participator issue.  Or am I being too pedantic?

 

 

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19th Jun 2013 12:14

Oops

Sorry about the typo glitches

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By smallbeancounter
19th Jun 2013 12:16

Lots of small businesses are run through personal accounts, including limited companies, because of very high bank charges for business accounts. My understanding is that if income is being received and expenditure is being paid by the personal account holder on behalf of the company it is not personal money in any respect, it is at all times the company's money held on trust for the company by the personal account holder who is acting as the company's agent. Does anyone know of an actual case where this practice has been found to be unlawful? Not interested in opinions, just facts. 

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19th Jun 2013 12:40

Breath of fresh air

smallbeancounter wrote:

Lots of small businesses are run through personal accounts, including limited companies, because of very high bank charges for business accounts. My understanding is that if income is being received and expenditure is being paid by the personal account holder on behalf of the company it is not personal money in any respect, it is at all times the company's money held on trust for the company by the personal account holder who is acting as the company's agent. Does anyone know of an actual case where this practice has been found to be unlawful? Not interested in opinions, just facts. 

Agree with this, with one proviso.  If I may say so, a breath of fresh air amidst a number of unhelpful posts referring to things being illegal and MLR reporting obligations arising etc., all of which are in my opinion frankly nonsense.  There is nothing illegal in shareholders lending money to, or borrowing it from, their own company.  Certain tax liabilities may arise of they borrow, rather than lend, and it would be illegal not to deal with those liabilities openly and honestly.  OP is asking for suggestions as to how to deal with the situation he has found.  He has not suggested that there has been, or will be, any failure to deal correctly with the tax liabilities that arise from the transactions that the company and its shareholders have entered into, so I do not think he needs advice on what to do in that event.

The proviso I make in relation to what @smallbeancounter says is that I would take great care before treating (i.e. for the purposes of preparing the company's accounts) money in a personal bank account as held on trust for the company.  The default, as far as I am concerned, is that a mirror image of the entries in the personal bank account goes through the DLA in the company's books.  The balance on the personal account does not therefore appear in the accounts as "cash at bank" but as on overdrawn DLA (obviously vice versa if the bank account is overdrawn).  I would only reverse that presumption if there is a formal declaration of trust and evidence that a copy of that declaration has been served on the bank.

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19th Jun 2013 12:21

And another thing...

So there's a fraud on the banks also!  We can't (because we're not allowed to!) tolerate that kind of financial anarchy without reporting it.  If we do, we're complicit.  But I am getting the impression it is just me after all......here in the wilderness......anyone agree with me?

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19th Jun 2013 12:35

Director loan account

If I see a company using a director's personal bank account I treat it as a director's loan. I don't treat it as a money laundering issue.

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19th Jun 2013 12:46

spooky

Just at the bottom of this topic I see an advert "Need a new bank account ?"

 

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19th Jun 2013 13:03

Isn't that normal?

Don't adverts relate to content a lot of the time?

I go on a lot of non-accounting websites and suddenly an accounts advert pops up!

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By NH
19th Jun 2013 13:05

taking this one step further

Agree with Johngrogan, no MLR issue here and to suggest that there is, is nonsense.  No suggestion of tax fraud, all income and expenditure is easily identifiable so whats the problem?

 

If anything the Director only stands to lose by not being able to retain funds in the company B/S.

 

However, regarding treating the closing bank balance as an overdrawn DLA, why would you do that when there is no way this will ever be paid back to the company?  The company has no bank account for a debtor to be received into.  To state an asset in the form of a DLA misrepresents the facts.  I agree in certain circumstances this may be an option but for me not a default position.

 

I dont see that a formal loan has been made from the company to the director when the company has no bank account to make the loan from.

 

Account for Income and Expenditure from the account and any other sources, state correct assets and liabilities, and treat the balancing figure as a dividend.  Of course if retained profits do not allow this then a Loan account would have to be used.

 

 

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By smallbeancounter
19th Jun 2013 13:10

If we had a decent banking system...

If we had a decent banking system there would be no need for what I have described. If everyone paid a fair price for a sensible banking service then there would be no point in a using personal bank account to run a small business.

The truth is that I see more and more reasons for nobody to bother trying to run a small business. It's all just too difficult, and too complicated, and too expensive.

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19th Jun 2013 13:57

I don't agree

smallbeancounter wrote:

If we had a decent banking system there would be no need for what I have described. If everyone paid a fair price for a sensible banking service then there would be no point in a using personal bank account to run a small business.

The truth is that I see more and more reasons for nobody to bother trying to run a small business. It's all just too difficult, and too complicated, and too expensive.

NIC is the main problem with small businesses but if you are willing to pay an accountant you can operate through a limited company and only pay corporation tax.

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19th Jun 2013 13:12

What about paying company expenses out of the bank account?

"However, regarding treating the closing bank balance as an overdrawn DLA, why would you do that when there is no way this will ever be paid back to the company?  The company has no bank account for a debtor to be received into.  To state an asset in the form of a DLA misrepresents the facts.  I agree in certain circumstances this may be an option but for me not a default position."

The overdrawn DLA will be cleared when company expenses are paid.

 

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19th Jun 2013 15:29

Agree with small beancounter....

....and johngroganger....  I am the director of my Limited Company, but the bank account is 'classed as 'personal' with my bank.  The only transactions that go through it are for the Limited Company. I also have a number of clients who do the same, to avoid bank charges.  As these clients all have healthy bank balances, I do not see it as an issue. In fact, one of my clients had a tax inspection and the inspector was quite happy with how the records were kept, and the fact that bank reconciliations were performed each month, with any small personal items going through a DL account, she was more than happy.

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By vras
19th Jun 2013 15:32

Who owns the funds?

If the company funds are channelled through a personal current account, how are cheques to the company being cleared?  If the account holder suffers a mishap (hospitalisation or even death), how does the company get it's money?   It will be difficult convincing the bank that the funds are the company's. If this ever happened, then the company will need it's own account just to be able to continue, so do it now and separate everything.

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19th Jun 2013 16:01

2nd Account

As i have said before I can not find any legal requirement for a Ltd Co to have a Ltd co titled bank account.

What the poster did not say is whether this personal account is an account with only business debits and credits or a mix of personal and business items.

As teresaweezer says if it is purely an account used for business then it is clearly an account "on trust".  teresaweezer also points out that Bank's can make it impossible to open a business account if one or more of the directors has a poor credit history.

  I have seen this with one of my client's when the bank shut down the business account because it was always overdrawn without permission.  I feel to assume that it is a DLA in the first instance is probally unwise.

As others have said no MLR required based on the facts but I too would recommend the opening of a business account if possible.

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By tom123
19th Jun 2013 16:26

What about the account names

Can someone confirm we are talking about John Smith Ltd funds going into John Smith personal account.

Otherwise, if the limited company name is very different how would the funds get into the account?

Or am I completely missing the point?

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19th Jun 2013 17:38

How about

Its all in your personal account therefore you are a sole trader not a ltd co

Oh the invoices are all in your personal name too...surprise surprise

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By smallbeancounter
20th Jun 2013 09:14

Details matter

@teresaweezer and pauljohnston:  I agree that if one is going to do this it's important that the only transactions that go through the account are for the business, whether it's a Limited Company or a sole trader. I should have made that clear. One account for the business, another account for personal transactions. Same as when you make purchases from something like a cash-and-carry where there's a risk of muddling up business and personal purchases; much better to have two trolleys, two bills, and pay one from the business's bank account and the other from the private bank account. 

tom123: Cheques? What's a cheque? Seriously, the demise of cheques makes the whole thing easier. In the (now rare) instances where cheques are received they are made out to the name on the account. To achieve this invoices state that payments should be made to that account. BACS instructions ditto. Most commercial customers have experience of being told to make payments to invoice factors rather than to a a bank account held by the supplier, so it doesn't raise many eyebrows there, and private customers don't seem to mind either. The key thing is that all relevant stationary, emails etc. need to state that the money is received in the account as agent for the company.

I am going to keep hammering home the key issue which is that bank charges for small business accounts are extortionate, whereas the banks give private individuals free accounts, and if this disparity were to be removed the whole issue would disappear. The government keeps saying they want to make life easier for SMEs. Here's something practical they could do quickly. They own half the banks in the country, whey don't they run them for the benefit of the country instead of continuing to allow the banksters to pay themselves bonuses?,

 

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20th Jun 2013 10:13

Free personal bank accounts

I assume that the costs of running a current account (monthly paper statements, apportioned rent and cashier wages, wages paid to management staff, and the miserly interest some current accounts still do pay) exceed the bank's return on investment, and that they real income stream are the exorbitant overdraft and overlimit fees.

Some may feel little sympathy for the feckless,  disorganised (or just poor) who subsidise free personal banking for others..

I feel that this is approach is not transparent. While we have learned to expect ancillary revenue streams being the real source of profits from companies like Ryanair, I expect banks, who should be ostentatiously fair in their dealings, to structure their charges in a more open way.

If you think about what running a bank branch must cost, business bank charges seem to me to be roughly proportionate. Business lending is another matter....!

 

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By smallbeancounter
20th Jun 2013 10:47

Business banking

ShayaClearBooks wrote:

I assume that the costs of running a current account (monthly paper statements, apportioned rent and cashier wages, wages paid to management staff, and the miserly interest some current accounts still do pay) exceed the bank's return on investment, and that they real income stream are the exorbitant overdraft and overlimit fees......If you think about what running a bank branch must cost, business bank charges seem to me to be roughly proportionate. Business lending is another matter....!

This is turning into a discussion about business banking but that's not a bad thing.

The obvious way forward is to provide low cost online bank accounts for SMEs which would reduce or eliminate the costs identified by ShayaClearBooks:

monthly paper statements: print your own for pennies off an online accountrent: don't have branches (I use First Direct and have done for over 20 years, they are absolutely brilliant)cashier wages: for the average business account these are not needed (see below re. cash handling)wages paid to management staff: charge on a time basis for management, most businesses would accept that if the fees are reasonable - and most business already do pay for meetings.miserly interest some current accounts still do pay: our business has two accounts, current pays no interest, excess cash goes to an interest-bearing accountBusiness lending is another matter: well Funding Circle and their like are going to deal with that. Ten years from now the banks won't have much lending business left if they don't pull their fingers out and start competing with the new peer-to-peer online providers

Cash handling is the big issue. Why not cut a deal with the supermarkets for them to run a cash kiosk service which would be available to any customer of any bank in the UK and charge a reasonable rate for receiving and issuing cash including change. This is a mechanical function and it doesn't need a bank to do it. The best way of charging would be a fixed fee per transaction to pay for the premises and wages costs and a percentage fee for the costs of storing and moving the physical cash. I'm not even sure that a cashier would be needed. 90% of cash handling transactions could be fully automated nowadays - machines are perfectly capable of handling all forms of cash.

I'd genuinely be interested in sensible comments about this because if there is any support I'm going to raise this proposal in the political arena. One of the things we need in the UK to get things going again is easier and cheaper bank facilities for SMEs.

Does anyone know whether the FSB or any other organisation is promoting ideas like mine?

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20th Jun 2013 18:48

Where is this going?

Unless the business is breaching its agreement with the bank the monthly charge is £5-£8, it pays extra for cheques and some charge for non-automated credits.  Even at £25 per month this is only £300 per annum.  Hardly a large sum.

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20th Jun 2013 19:10

I agree with Paul

I have a business bank account and the charges are very reasonable for each transaction.

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21st Jun 2013 12:03

Santander online, no frills, no counter service, £7.50 per month with unlimited transactions and all cheques etc...

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By smallbeancounter
23rd Jun 2013 11:22

Santander? Hmmmm....

Smartie99 wrote:

Santander online, no frills, no counter service, £7.50 per month with unlimited transactions and all cheques etc...

See: http://www.marketoracle.co.uk/Article39770.html

Scroll down or search for 'Santander'

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21st Jun 2013 12:56

Free business banking

Federation of Small Business members get free banking with the co-operative bank.

Metro Bank also do a free business bank account for smaller businesses.

I'm not convinced either have a sustainable model.

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