Crossing the Line? A Look into Transferring Funds from an LLC to a Personal Account

Is it legal for the owner or sole shareholder of an LLC or LTD to withdraw funds from the business for personal use? While having access to the company’s account may make it appear straightforward, it’s essential to consider the legal and tax implications before you do so. Although the individual legally owns the company, withdrawing profits from the business without proper consideration may result in significant legal and tax-related issues.

It is possible to withdraw money from an LLC or LTD on legal grounds, and it’s crucial to explore these options for practical purposes. With several options available, misapplication or misinterpretation of corporate laws may lead to unforeseen legal conflicts and other complications for the company owner.

Looking to take money out of your business account for personal use? Here’s what the options available to you include:

1. Paying yourself a salary, fee, or compensation as the director, owner, or main shareholder.
2. Repaying any loans you provided to the company as a director or owner in the past (compensation payments).
3. Taking advantage of additional benefits from the company, such as using a company car for personal purposes.
4. Distributing profits through dividend payments in a standard manner.
5. Taking out a loan or borrowing money from the company.

To select one of these legitimate methods, careful consideration of the mandatory reporting, accounting requirements, and potential tax liabilities involved is necessary. Simply taking money out of the company and using it for personal purposes is strictly prohibited without proper documentation. With no proper evidence to support the transaction, this might be seen as tax evasion or theft in some jurisdictions. 

For more information on the subject, please refer to the International Wealth article below: How to Withdraw Money from an Offshore Bank Account – Legal Schemes in 2023.

When it comes to withdrawing funds from a company account by its director, owner, or founder, they should keep certain key aspects in mind:

• First and foremost, a company is considered a separate legal entity from its owner or founder. This means that the company exists independently and is determined by its organizational and legal form, such as LLC (Limited Liability Company), which varies from country to country. Depending on your jurisdiction, it may be LTD for a Limited Company, LLC for a Limited Liability Company, LLP for a Limited Liability Partnership, and so on. Therefore, carefully choose the appropriate organizational and legal form when registering the company.
• Secondly, the profits generated by the business do not belong to the founder, director, or majority shareholder, but to the company as a legal entity.
• Finally, withdrawing money from the company’s corporate account to a personal account is possible and legal, but it’s subject to certain important conditions. The business owner shall officially inform the company’s management body and, in the case of multiple owners thereof, obtain their consent. You should by all means consider any possible tax obligations and requirements for returning the funds. FYI: the latter depend on the specific laws and regulations in the country.

Salary and wages

To transfer funds to a personal account, the most common method is to receive an official salary, wage, or compensation as a director. These transactions are completely legal, but typically follow a set schedule, making it impossible to withdraw money at will. However, dividend payouts or director loans offer more options for flexibility. There exist limits on the maximum amount of funds that can be withdrawn, and one needs to be mindful of applicable tax obligations that come with such transactions.

For more information on the subject, please refer to the International Wealth article below: FAQ about Trust Costs, Assets, Taxes, and Profit Distribution.

Summary: When it comes to withdrawing money from a corporate account to a personal one, the director’s salary is typically the most common method. The company has several responsibilities in this regard, inter alia, withholding taxes from payments, making employer pension contributions, and providing information on the director’s salary to the ATO. The director, shareholder, or owner must fulfill certain obligations by reporting any payments made to a personal bank account (such as salaries and bonuses) through a tax declaration.

Compensation payments

If you choose to withdraw funds to a personal account via this method, you should be aware that they will be subject to Fringe Benefits Tax (FBT). FBT is a tax on certain non-cash benefits that employers give to their employees. The tax liability in this case falls on the employer, not the employee.

Some common examples of non-cash benefits that may be subject to FBT include gym memberships, health insurance, company cars, and reimbursed expenses such as travel or meal costs. While these benefits are a great way to increase your overall compensation package, keep in mind that they are considered taxable income and shall be reported on your tax return.

Summary: Compensation payments are a significant means of transferring funds from a corporate account to a personal one. The company must file an FBT declaration and pay taxes that may be due. The director, shareholder, or owner typically does not have to take any actions as regards tax reporting, unless it is a must. Some benefits, such as low-interest loans, are subject to additional regulations and shall be reported to the tax authority.

Repayment of corporate loans

When a director or owner has the authority to take out a loan from the company, the reverse scenario is feasible. In such cases, you may move the money from the business account to a personal account and record the transaction as a business loan, as long as the funds have been previously transferred to the company.

Summary: Loan repayments are essential to duly move funds from a corporate account to a personal one. Although the company may not seek tax deductions for loan repayments, it is free to legitimately claim deductions for interest payments. The director, shareholder, or owner doesn’t have to report anything to do with taxes. However, if paid together  with the principal amount, interest payments will be considered in calculating taxable income.

Dividends

You may easily transfer funds to a personal account through dividends. It is a standard method that doesn’t require complicated schemes. The company pays shareholders rewards in the form of dividends, and Australian laws permit franking credits to be included in the dividend amount. Franking credits are essentially the tax already paid by the company and passed on to a specific shareholder.

Summary: The most common way to transfer funds from a corporate account to a personal one is through dividends. The company must notify all eligible shareholders about the dividends, including the amount of franking credit and its degree. In some cases, additional requirements apply to filing tax returns for the franking account. As for the director, shareholder, or owner, they shall disclose any loan payments received in their tax returns. If they fail to do so, tax liabilities may arise.

For more information on the subject, please refer to the article below: Corporate Accounts for Crediting and Withdrawing Funds to and from China, Indonesia, Thailand, Vietnam, and Malaysia.

Loans from companies

To withdraw funds with subsequent mandatory repayment is not the most commonly used option. Yet in some cases, it may be your only choice. Such a loan shall meet several requirements. Failure to comply with them may lead to significant issues for the director, owner, or shareholder and the company itself.

To avoid undesirable tax consequences, do your best to meet either of the 2 mandatory requirements before you file your declaration:

• The loan is repaid.
• The loan is formalized by a written agreement (with a date and signature); the interest rate is specified (it may not be lower than the base interest rate for the specific year); and the loan term does not exceed 7 years (25 years if the money was borrowed against real estate collateral).

If the loan meets both requirements, it is called a complying loan.

Summary: One of the primary ways to move funds from a corporate account to a personal account is to obtain a loan from the company. To ensure compliance with tax regulations, the company reports all interest payments to the tax authority through a declaration. For the director, shareholder, or owner, it is essential to make minimum payments every year and refrain from taking out a new loan to cover these payments. Instead, they may use dividends for this purpose, provided they declare it in a personal tax declaration.

Exploring alternative personal uses of company funds and assets

To move money from a corporate or business account to a personal one, account holders are free to use different ways and methods. Nevertheless, in numerous nations, including Australia, the action may lead to several legal challenges. Unallocated dividends are among the most typical issues that may arise.

Here’s what potential negative outcomes may include:

• For the company: inability to qualify for a tax credit on dividends or to stamp dividends as franked.
• For the director, shareholder, or owner: compulsory identification of dividends as earnings in tax declarations and the potential obligation to pay income tax on unassigned dividends.

And here’s what you can do to avoid the situation altogether: 

• If a need arises to transfer company funds to a personal account, one of the methods mentioned above may be used, but only before the company’s tax return filing date.
• If the owner or director of the company is the only controlling person, it is better to separate the personal and corporate accounts, even with no strict legal requirements for maintaining 2 separate accounts in place.
• Keeping accurate and current accounting records of the company is mandatory. These shall include all incoming and outgoing payments, such as payments and loans to shareholders, the director, and the owner.
• You should settle any outstanding debts to the company before transferring funds to a personal account or before the deadline for submitting the personal or corporate tax return, whichever comes first.

For more information on the subject, please refer to the International Wealth article below: Dividends vs Salary – Business Owner’s Dilemma.

To prevent the risks associated with incorrect calculation of tax obligations, especially in situations that involve a director’s loan, it is highly recommended to use the official services the tax authorities of the specific country provide. These services offer only up-to-date and accurate information with guaranteed error-free processing. If one tries to calculate the annual payment independently, especially after withdrawing money from the company to a personal account, undesired outcomes may be major.

In the absence of aggressive tax optimization, tax authorities generally take a lenient approach to accidental and unintentional errors, also known as honest mistakes. Therefore, in the event of any inaccuracies, be sure to contact the tax office immediately and report the issue. Negative consequences are highly unlikely in most cases.

Real-life examples

The International Wealth pros have compiled an account of typical scenarios when the transfer of funds to a personal account was carried out in full compliance with the existing laws and regulations. You should by all means consider this option during the business registration phase and evaluate the implications of transferring funds to a personal account as far as individual and corporate tax commitments are concerned.

For more information on the subject, please refer to the International Wealth article below: What is the most tax-efficient way to pay yourself as a business owner?

Case 1

Iris operated her catering business as a sole proprietor for a considerable amount of time, which suited her well. Her company catered to small businesses and private individuals looking to host outdoor events. During this time, she met Steve, whom she eventually married, but continued to pay herself a USD 2,500 salary by transferring the necessary amount from the company’s corporate account to her personal account.

When Iris and Steve decided to transform their business into a fully-fledged limited liability company, a tax expert informed them that Iris would receive an official salary from her company. This necessitated setting up the accounting software and a Super Guarantee option to ensure contributions (9.5% of gross salary) to her super fund. When she files tax returns, Iris specifies her salary.

After their daughter was born, and it was time to enroll her in daycare, they opted to utilize the company’s funds to pay the USD 3,000 fee through a director’s loan, with the possibility to withdraw the funds into their personal account. The official contract included Iris and Steve on one side and their company as a legal entity on the other, with a loan amount of USD 2,500, an interest rate not lower than the base rate, and a 3-year term. When filing her tax return, Iris treats the loan interest as company profits.

Case 2

Jacob has been residing in Australia for quite some time. He is the proud owner of a prosperous company that supplies corporate software. The business is thriving and he decides to finally make his dream a reality by fixing the roof of his house. Since Jacob is the director and sole shareholder of the company, he takes the necessary amount from the corporate account without contemplating the possibility of transferring the money to his personal account.

Jacob’s accountant is extremely knowledgeable and notices the unusual transaction on the company’s account. The accountant clarifies that if no action is taken, the transaction will be identified as an unfranked dividend (Division 7A dividend). The term is specific to Australia, but corporate legislation in many jurisdictions has comparable mechanisms.

To prevent potential legal issues, Jacob chooses to reimburse the amount that he previously withdrew from the corporate account. Since this was done before the next tax return filing date, Jacob and his company will not suffer any negative repercussions. Furthermore, the accountant convinces Jacob that he should only pay personal expenses from his personal account or via legal money transfer methods.

Case 3

Monica runs a thriving tourism company that customizes tours across Australia. Besides her, 5 other individuals are in the business. To motivate them, the company offers its staff the chance to relax once annually during the off-peak tourist season in any of its private villas.

Monica availed herself of this opportunity to take a break by the seaside with her partner and daughter. Her personal use of the company’s assets didn’t result in legal complications as the vacation was treated as an employee benefit, and corresponding records were submitted in the FBT (Fringe Benefits Tax) declaration.

The director of the company may transfer funds to their personal account, but they must adhere to all legal regulations. They must fully comprehend the financial and tax consequences of the choice since the company is a legal entity separate from the owner. This indicates that company finances and personal assets may never be mixed without legitimate reasons. Should it become truly necessary, a lawful alternative shall be used as stipulated by law.

To book consultations or contact the International Wealth profs, don’t hesitate to message us at the below email: info@offshore-pro.info.