Startup ecosystem · Incorporation
Director loans: Sec 185 restrictions and the penalties
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Facts
Sec 185 prohibits a company from lending to its directors. This is the most commonly violated provision by early-stage startups. A founder who "borrows" from the company account for personal expenses has violated Sec 185, penalty: equal to the loan amount, imprisonment up to 6 months.
Provisions and law
- Companies Act 2013, Sec 185, 186
Analysis
Common violations: Founder pays personal credit card bill from company account. Company pays founder's personal rent. Startup "gives advance" to founder for business expenses that never materialise. Exceptions under Sec 185: Loans to wholly-owned subsidiary companies. Employee loans if director is also an employee under a scheme applicable to all employees. OPC, no restriction.
Conclusion
- Pay yourself a higher salary (approved by board) and use personal funds
- Raise expense reimbursement claims with proper bills and approval
- Use company credit card for company expenses only
- Director "advance for business purpose" must settle within 30 days with receipts
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