If you are the owner of a small company, particularly one where you are the sole director and shareholder, it might be easy to think of the Company’s money as being your own. You may be tempted to withdraw money from the company to fund your own personal interests without much thought, but it is important to understand the basics of your duties as a director and the pitfalls of treating company money as your own.
Running a small business often involves wearing multiple hats, from managing day-to-day operations to making strategic decisions and overseeing finances. If you’re a company director, especially a sole director and shareholder, it’s vital to understand that your legal duties extend beyond just running the business efficiently. The Companies Act 2006 sets out specific obligations you must follow, and failing to do so can have legal and financial consequences.
The Seven Statutory Duties of Company Directors
The Companies Act 2006 provides seven key duties a company director must adhere to. These apply to all directors, from a large multi-national down to a sole director and shareholder business. These duties are, briefly, to:
- Act within your powers (Section 171);
- Promote the success of the company (Section 172);
- Exercise independent judgment (Section 173);
- Exercise reasonable care, skill and diligence (Section 174);
- Avoid conflicts of interest (Section 175);
- Not accept benefits from third parties (Section 176); and
- Declare interests in proposed transactions (Section 177).
There are many clear-cut scenarios where one of the above duties might be breached, such as a director entering the company into a contract with another of the director’s companies without declaring their involvement (possibly breaching at least 5 and 7, and possibly 2 and 3 as well). However, it may not always be so obvious, and there are many implicit ways in which the duties might be breached.
Risks and Consequences of Breaching Directors’ Duties
Failing to uphold these statutory duties can have serious personal and professional consequences. Even if you are the only director and shareholder, you remain accountable and must consider your duties as a director. Some of the risks include:
- personal liability to a director if a breach results in loss or damage to the company and that director has breached their duties;
- disqualification as a director for serious breaches;
- criminal sanctions in the most severe cases (including fines or, rarely, imprisonment); and
- reputational damage – an accusation of a breach of duties may reflect poorly on the company as a whole, even where none of the previous risks are substantiated.
Use of Company Funds by a Sole Director and Shareholder
As alluded to earlier, many small business owners operate as the sole director and shareholder. It’s easy to assume you have full access to company funds, but legally, the company is a separate entity and the money the company owns is its own.
It is important therefore to remember that you can only take money from the company through proper channels, such as via salary, dividends or director’s loans. Each of these channels has its own rules and quirks which should be adhered to in order to avoid the risk of any sanctions.
Final Thoughts for Small Business Owners
Being a director, even of your own small business, carries legal responsibilities. The Companies Act 2006 expects you to uphold your duties regardless of the size of your company. If you feel unsure about your duties then you may benefit from speaking to one of our professionals. At Roythornes, we help small business owners navigate these rules with confidence.