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Running a small business can be an incredibly rewarding experience. You get to build something from the ground up exactly as you would like to be, a testament to your hard work and determination. But what about more material rewards? Once your company starts to turn a profit, how can you actually get that money out of your company and into your own pocket?

 

The two most common types of small businesses are limited companies and self-employment - yes, as a self-employed individual, you technically count as a business! The business simply shares the same legal name as you do, and for all intents and purposes they are the same entity, both legally and financially.

 

This makes self-employment the easiest method of structuring things. Because you are the company, the money is already yours - but so are the debts. If you incur a business debt while you're self-employed, even if you cease operations you are still personally liable for any debts. Self-employment may be the easiest method, but it's also the riskiest method from a legal perspective.

 

On the other hand, if you establish a limited company, it acts a separate legal entity from you. Even if you're the only employee of that company acting as director, shareholder and CEO, you're still technically separate in the eyes of the law. This means that the profits generated by your limited company belong to that company and not directly to you, which can make extracting profits from the business more difficult.

 

Typically, taking money out of your company comes in the form of wages. The salary you set yourself is registered as a payroll with HMRC, and you can choose to set that salary at whatever the company can afford to pay you. Most people running their own limited companies follow the amounts set as the National Insurance Primary Threshold, but it's up to you.

 

The reason for setting such a low salary comes from the other method of extracting money from a company: dividends. Dividends are declared at the end of the financial year, after corporation tax has been paid and the true profit your company generated have become clear.

If you want to start taking money out of the company before a dividend is declared, you can borrow against future dividends in a process known as a director's loan. The taxation on dividends is generally charged at a lower rate than other taxation across all tax bands, but be sure to check with your accountant to ensure that you've got the best possible setup!