It is very important that entrepreneurs learn how to manage their shareholder loans because 80% of all businesses use personal finances in order to finance their business says Edmonton bookkeeping. When business owners make money from their business in order to pay household expenses, they need to understand how that affects their business finances, so they can take out money efficiently and effectively, so that they are not paying additional taxes, or getting penalized for taking that amount out.
One of the first things that entrepreneurs need to understand, is what the shareholder’s loan account is. Only businesses that are incorporated will end up having a shareholders loan accounts, and it is set up in the liability section of the balance sheets of the financial statements of the business says Edmonton bookkeeping. This is designed to help an entrepreneur keep track of all of the money that they have taken out of their business for personal use.
Since a business that is incorporated is considered a separate legal entity from the business owner, anything that the entrepreneur takes out of their business, whether it is to pay for household expenses, to take out cash, he was for meals or groceries, taking money out of the business is one type of shareholder transaction says Edmonton bookkeeping. Also, if an entrepreneur uses their own personal money in order to pay for business expenses, that is also considered a shareholder loan transaction.
While it is possible for business owners to owe money to their corporation, it is not advisable to have taken out more money of the shoulders loan accounts and business owners are planning in. Entrepreneurs need to understand that for all the money that they take out of their corporation through the shareholder’s loan account, they end up paying personal taxes on. Business owners are allowed to holds an overdrawn shareholders loan accounts, but if it is held for over a year, Canada revenue agency could potentially require an entrepreneur to pay interest charges on that amount. Since it is technically a loan from the business to the entrepreneur, and they are two separate legal entities. It is more advisable for an entrepreneur to deal with the outstanding shareholders’ loan amount in their business to avoid potentially paying penalties on it.
It is always advisable for business owners to keep their personal transactions and their business transactions separate. While it is sometimes unavoidable, business owners should not only have separate bank accounts, but they should also have separate credit cards. This way, it is very clear what transactions were business and transactions were personal, so that the shareholders’ loan account does not end up being complicated. A business owner should use their corporation as a vehicle to save their money and help it grow and is the most effective way of ensuring their business survives.
When entrepreneurs understand what their shareholder’s loan account is, and how it is affected, they can ensure that they are taking money out of their business in a way that will have them paying any additional taxes.
Edmonton Bookkeeping | How To Manage Shareholders Accounts
Business owners should get into the habit of learning how to utilize their shareholder’s loan accounts efficiently says Edmonton bookkeeping. The reason is, so that they can avoid paying any additional taxes on amounts that they take out of their business. Since the shareholders loan account is a way for entrepreneurs to keep track of the money that they have not only taken out of the business but put back into the business, it is very important that they understand how to make money out as well as money into their business, so that they can do so efficiently.
One of the most important things that an entrepreneur can do, is figuring out how they can pay themselves. Edmonton bookkeeping says that there is two ways for entrepreneurs to get paid when they own a corporation. They can take money out through a salary, or by taking dividends. Since this is usually a complex issue, they should get an accountant to review not only their business and personal finances to determine the best possible split of salary in dividends in the business. There are several factors that need to go into figuring it out, including is the business owner the sole owner of the corporation or do they have partners? Are they depending on the money they take from their corporation to support their family?
Salary is the most common way for an entrepreneur to get paid in order to get rid of the shareholder loan account amount. The reason for this is because when an entrepreneur takes salary, it decreases the profit of the business, which is an important factor if an entrepreneur has a debt looking at their profit and loss. However, if entrepreneurs pay themselves a salary, they also have to take into consideration the fact that they will have to pay income tax, EI and employer plus employee CPP contributions on the amount that they take. This also shows up on the entrepreneur’s personal taxes.
A dividend on the other hand, is the way the company distributes the prophets. Dividends will show up on the balance sheet of the business, instead of the income statement. Because of how dividends and salaries are different, and how it is distributed, taxed, and shows up on the financial statements, an entrepreneur needs to be very methodical on how they take money out of their business. By allowing their accountant to help make the decision with them, they can ensure to have the best split of dividends and salary that is going to minimize the taxes that they pay, while affecting the bottom line of the business the least.
Understanding how their shareholder’s loan account works on the financial statements of the business can help entrepreneurs learn how to take money out of their corporation efficiently and effectively so that they are minimizing the taxes that they pay.