How Should I Account for My Own Investment into My Startup?

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Posted on May 26, 2017

How should I account for my own investment into my startup?

Find out how to account for your own investment into your startup and various ways to get the best return on your investment.

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When you set up your own business, it’s often necessary to bankroll it from your own funds, especially in the early days. But you’re not making a donation; you want the money back. So how do you do it?

How should I account for my own investment into my startup?

  1. Invest in shares. Buy shares in your own company.

  2. A shareholder loan. Loan money to your company.

  3. Become a creditor. Make a director’s loan to the company.

It’s not a simple matter of transferring money from your personal account to your business account. There are rules that make this more confusing, particularly where your company is a limited liability company.

The main thing to consider is that you can’t just move money in and out on a whim. You have to identify a role in which you’re doing it. Are you a private person, a director, shareholder, or an employee? You could be all of them, but you need to pick one to record in the accounts.

The best way to explain this is to imagine it’s not you giving the money; it’s somebody else investing in your company. So think about how you’re going to account for it, and how they get their money back when they need it? Here are a few of the options.

Invest in shares

You can buy shares in your own company. Any money you invest is then credited to share capital. If you bought the shares for more than their face value, the surplus amount can be classed as share premium.

This is fairly straightforward and only requires you to keep records of the transaction, giving you an easy way of getting money into the business.

You could also extend your shareholding in much the same way. Check the Articles of Association to see if this is allowed. If you’re the sole director or shareholder, there’s no reason why it wouldn’t be.

Business Tip: Ensure you keep full records of all transactions.

A shareholder loan

As a shareholder you can loan money to your company. This cash is classed as a shareholder loan, but it’s a little more complicated and would really benefit from the advice of a professional accountant.

It’s important to remember that as a shareholder you own the company, but you do not own its assets. This means any money you loan to the company belongs to the company, so it’s harder to get it back out.

Business Tip: In other words, don’t put money in as a shareholder if you might need it out again shortly.

Become a creditor

Becoming a creditor is an effective way of putting money in for the short term.

You can do this by making a directors loan to the company. This is nothing more than an accounting tool, a virtual bank account that exists only in your records. It works on the pretext that your money is your money, and the company’s money belongs to the company. The director’s account is set up in the records; it doesn’t actually exist as a functioning bank account, but as a repository for the money you’re loaning.

This allows you to transfer a sum of money into the company bank account for investment, which would then be recorded in the director’s account and exist as money owed to you by the company. The great benefit of this system is that it can cover a multitude of functions that might be needed to be fulfilled in the early days of a company’s life.

Say you need a new PC for the company that you have to buy from personal funds. This item can then be recorded as a figure in the director’s account. You can also pay a month of your director’s salary into it in lean times, which you can collect at a later date.

Business Tip: Money in the director’s account exists as a loan from you to the company, which you can reclaim at any time so long as the company has sufficient funds to cover it.

How to proceed

Accounting for your own investment in your startup involves recording and documenting everything you do. There are ways of investing in your startup that meet both yours and your company’s needs.

For more advice on small business accounting, get in touch with an accountancy firm, who will be able to guide you safely through every step.

To make the best investment decisions for you and your startup, get in touch today.