Often, business owners struggle to understand basic financial literacy says Edmonton bookkeeping. In fact, into it who are the makers of accounting software QuickBooks did a survey of small business owners and entrepreneurs in order to quiz them on their understanding of basic business finances. Respondents of the quiz were asked questions such as how to improve cash flow in their business, what our accruals as well as what is the role of a balance sheet. 82% of the respondents scored less than 70% on the test showing how big a problem this is. When entrepreneurs struggle with understanding their business finances, this can greatly impact their business.
An accountant may choose to set up a business owner with the holding company. There are several reasons why an accountant would choose this corporate structure says Edmonton bookkeeping. However, many business owners do not understand what this is or why. The first thing those business owners should understand about this type of corporate structure is what is a holding company. This is a corporation that owns another corporation by having a stake in the company. The sole purpose of the holding company is to control a business.
The next thing that entrepreneurs want to know once they hear about holding company is what is the benefits of one corporation owning another? Edmonton bookkeeping says that this actually gives a business owner a layer of protection. This holding company which is also called a parent corporation is the entity that owns the operating company, having a business owner protection and minimizes their risk. Other benefits include being able to do more tax planning which can help an accountant to minimize the taxes that an entrepreneur has to pay, and also gives them flexibility if they are planning on opening more businesses, or purchasing assets.
The next question that many entrepreneurs have when they hear about this type of corporate structure says Edmonton bookkeeping is are there any drawbacks to this corporate structure? While there is not specific drawbacks, a business owner needs to understand that these two corporations are considered separate legal entities, and therefore they have separate year ends. Not only does this mean the business owner will have to get two different year ends done, but each corporation might have a separate fiscal year-end as well. Therefore, it is extremely important that the finances are kept up-to-date so that each year-end can be done accurately when it is time for each one to be finished.
There are several reasons why an accountant would structure an entrepreneur business this way. However, regardless of the reason why, a business owner needs to understand that when they have the corporate structure like this, they need to be prepared to do two different year ends, as well as keep their financial records very accurate and very detailed so that their Edmonton bookkeeping company can keep the most up-to-date financial statements possible for the business owner.
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If business owners are not aware that their accountant has set up there corporate structure as a holding company and an operating company, Edmonton bookkeeping says. They might be confused as to why they must do two different year ends, or what problems that are going to create when those two-year ends do not match.
Not only is it important for an entrepreneur to understand if this is there corporate structure, but what they need to understand to ensure that they can keep accurate financial records. One of the first questions entrepreneurs often have when they discovered that this is there corporate structure is what are the common financial errors that can happen with this typical corporate structure? If not nor does not vindicate with their Edmonton bookkeeping company what corporation each of the transactions needs to be posted to, could end up with their bookkeeper entering them into the wrong corporation. What this could end up doing, besides ending up with corporations that cannot be balanced, is with entrepreneurs having to pay more tax, or even getting penalized if transactions were classified incorrectly.
Other common errors are if their Edmonton bookkeeping company thinks that checks are automatically deposits that should be entered into the prophets of the operating company, mixing up expenses between operating company and holding company, or misclassifying shareholders loans amounts. These common mistakes end up with not only inaccurate financial statements from their Edmonton bookkeeping company, but also with an accurate year ends as well.
An entrepreneur will often wonder how to ensure they avoid these mistakes. Edmonton bookkeeping recommends that business owners keep track of all transactions, not just what company they should be posted to, but where in the financial statements they need to be entered, and that they ensure that both corporations are balanced every month all of the time. This way, if mistakes are made, it is easier to catch because they are only in one month. This can help ensure that at the end of the year, both corporations not only will balance themselves but also balance with each other. This is especially important if the corporations and up with different corporate year ends.
Business owners should be aware that even though mistakes are common, one of the benefits of having a corporate structure like this is so that a business owner can move funds from one corporation to the next and keep it tax free. This is especially beneficial if a business owner ends up with an overdrawn shareholders loan account, having this corporate structure can help them avoid paying more taxes and help them delay paying themselves until that shareholders loan account is no longer overdrawn.
By understanding what the corporate structure is, and how to keep accurate records can ensure that a business owner is making use of this corporate structure properly, while avoiding errors that can commonly occur. By learning this early on in their business can help a business owner avoid mistakes from the beginning that might affect their profitability.