When an entrepreneur understands how to use their shareholder’s loan account efficiently, Edmonton bookkeeping says that they can minimize the taxes that they pay, and take money out of their corporation efficiently. Since 80% of all business owners and abusing personal finances to pay business expenses, it is very important that business owners learn how to use their shareholder loan accounts as soon as possible in their business so that they can become very tax efficient.
The first thing that an entrepreneur should understand is that a shareholder’s loan account is a function of a corporation. It is set up in the liability section on the balance sheets, and it is designed to keep track of all of the money that an entrepreneur takes out of their business for personal use, as well as keeps track of all of the amounts that the entrepreneur pays personally into the business. If an entrepreneur owns a proprietorship, they do not have shareholders and do not need shareholders loan accounts. The need to keep track of all of the money that they take out of their business, and declare it on their personal taxes.
Any time an entrepreneur takes money out of their business or uses business funds for personal purposes, they need to keep track of that, so that it can be entered into the shareholder’s loan account. Also, when an entrepreneur uses their personal money to pay business expenses, that also needs to be tracked in their shareholder’s loan accounts. The goal for an entrepreneur would be to minimize how often an entrepreneur uses their business finances for personal use. Edmonton bookkeeping says by keeping track of all the transactions shuns into and out of their business for personal use, they can balance the shareholders loan accounts, and at the end of the year, if an entrepreneur has taken out more money than they put in, they need to declare to Canada revenue agency if they have taken it out as a salary or dividends.
It is possible for an entrepreneur to over their corporation for a short period of time says Edmonton bookkeeping. However, it is not advisable for several reasons. One of the first reasons is, once it is overdrawn for over a year, it is considered a long-term liability, and Canada revenue agency may require an entrepreneur to pay the corporation interest. The reason why, is because the corporation and the business owner considered to separate legal entities from each other. If CRA gets involved, they can end up paying additional interest and penalties, so that should be avoided at all costs, to help an entrepreneur avoid paying more than they should.
When entrepreneurs understand why their shareholder loans exist, and how to use them, they can start to efficiently manage the money that they take out of their business as well as put into it, in order to minimize the taxes that they have to pay on money that they have taken out for personal use.
Edmonton Bookkeeping | Managing Shareholders Loan Accounts
A very common scenario that most entrepreneurs face at some point in their business says Edmonton bookkeeping, is when an entrepreneur takes money out of their business in order to pay household expenses. They end up paying more tax from taking money out of their business personally, however, there is not enough cash in their business to support the operations of their corporation. This is such a common scenario, that if entrepreneurs learn how to manage their shareholder’s loan accounts, they can avoid this scenario.
Any time an entrepreneur takes money out of their business, and it is up taking more out than they put in over the last year, they need to make the decision on how they are going to declare to Canada revenue agency they were paid. To decisions says Edmonton bookkeeping are between declaring a salary or declaring dividends. There are several reasons why an entrepreneur may need to declare one or the other, but an entrepreneur should also understand the difference between the two, so they can help their accountant make that decision.
A dividend in the corporation is the amount that the corporation has declared in order to distribute the prophets. Dividends will show up on the balance sheets of the business and is not considered an expense of the corporation, and it does not decrease the profit of the business. When an entrepreneur takes dividends out of their business, it does not affect the bottom line.
Salary on the other hand says Edmonton bookkeeping, is the amount that an entrepreneur pays themself as an employee. When an entrepreneur takes a salary, they also have to pay income taxes, CPP and EI on that amount. So any time they take a salary, they need to consider if they also have the money to pay the taxes. Also, taking salary decreases the profit of the business, because it is technically considered an expense. The more salary that an entrepreneur withdraws, the more it makes the business look like it is not profiting. Salary is also the most common way that a business owner would get rid of the surplus in the shareholder’s loan account.
There are several factors that entrepreneurs along with their accountants need to take into consideration when making the decision of if they should pay themselves salary or dividends. Edmonton bookkeeping says that it is usually never a hundred percent one or the other. It is usually a mix, depending on how profitable the business has been, the amount of shareholders loan in the corporation, and if they’re depending on the money to support their family, or if there the sole owner of the corporation for example.
When business owners understand salary or dividends, they can figure out the best way to make money out of their business in a tax-efficient manner along with their accountant. When they do that, they can ensure they are making enough money to live on, and affecting the bottom line of their business the least.