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Startup ecosystem · Incorporation

Director loans: Sec 185 restrictions and the penalties

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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

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.

Close

  1. Pay yourself a higher salary (approved by board) and use personal funds
  2. Raise expense reimbursement claims with proper bills and approval
  3. Use company credit card for company expenses only
  4. Director "advance for business purpose" must settle within 30 days with receipts

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