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Funding of companies / Withdrawal of Funds (Directors should strive to…
Funding of companies / Withdrawal of Funds
During the period that the company is in existence, it can be funded from external sources such as capital or debt
The company may earn income on its activities and may decide to fund its future activity by retaining profits in the business
Capital
The most common way for funding is the issuing of share capital including ordinary shares, preference shares or preferred shares
Shares may be paid for in cash or supported by the transfer of assets
Debt
The company can also raise funds in the form of loans
Loans may be
From the beneficial owner
An unsecured loan stock
As secured debentures
From the trustee of an overlying trust or an underlying or association company
From other third parties such as banks
Obtained from short term credit from its creditors
As valid claims from creditors should always be settled, the directors should ensure that there are sufficient funds to enable this to happen
An owner of a limited liability company or a corporation enjoys limited liability for the businesses debts. In other words the owners liability is limited to the amount they invested (or promised to invest) in the business entity
The entity itself has unlimited liability for all of its debts. Because of the inherent risks associated with the operations of a company, generally the assets invested within the company are more vulnerable than the owner's personal assets outside of the company
Directors should strive to minimise the amount of vulnerable capital invested within the company. They can accomplish this goal when starting their business in several different ways including
Initially investing a minimum amount in the entity
Capitalising the entity with debt (loans and leases)
Obtaining extensions of credit (eg loans and unpaid salary) from the owner to the entity
To be effective long term, the initial strategy of minimising the amount of capital invested within the company must be combined with a strategy calling for regular withdrawals of money from the company as income is generated
Funds generated by the company but left within it are in essence invested in the company, as if they were invested from an outside source but in a way this leaves the company vulnerable to claims of its creditor. A continual withdrawal of funds as they are generated guarantees that vulnerable funds will not accumulate within the company
Directors need an understanding of the restrictions on withdrawals before they review the withdrawal methods available to them. Once the plan to minimise vulnerable capital is in place, the directors will need proper authorisation and documentation to secure the withdrawals from a creditor's challenge
Any company planning a major expansion, requiring a significant amount of capital will probably agree that the best way forward would be to accumulate the funds in the company
The withdrawal of funds often interlinks with the manner in which monies were originally raised
Repayment of capital is usually undertaken as redeemable share (if this type of share has been issued), as a dividend payment and on liquidation of the company as surplus monies depending on priority
Repayment of debt is usually by way of the repayment of capital and interest if this is chargeable
Distributions to the beneficial owner or payments to other associated parties is by way of: the provision of a loan receivable, a capital distribution or the payment of expenses