While Edmonton bookkeeping recommends that entrepreneurs avoid making personal transactions into or out of their corporation, it often cannot be avoided. 80% of all entrepreneurs end up using personal finances to pay business expenses according to Industry Canada. Therefore, while entrepreneurs should avoid putting money into their business personally and taking it out when they do, they should understand what a shareholder loan account is, so they can ensure that there keeping track of that money effectively and efficiently.
Shareholders’ loan accounts are important for business owners of corporations to know about. Edmonton bookkeeping says that if an entrepreneur owns a proprietorship, since proprietorships do not have shareholders, they do not need to worry about keeping track of the money that they put into their business or taken out of their business as a shareholder loan account, they just have to claim to CRA all the money that they have taken out of their business as income on their tax return.
All transactions that an entrepreneur makes personally in their business both into their business and out of, is tracked and the shareholder’s loan account, which is an account set up in the balance sheets of the business. It is listed under liabilities on the balance sheet and is designed to keep track of all of the money that an entrepreneur has paid personally into the business as well as taken out of their business. Examples of transactions that should be considered shareholder transactions are if an entrepreneur has taken cash out of their business, paid for a meal in a restaurant, or even purchased groceries for example. Also, if an entrepreneur has use their personal finances to pay a business bill, that should also be listed in the account.
At the end of their fiscal year, Edmonton bookkeeping says that business owners will calculate how much money they put into their business and how much money they have taken out. All of the money that they were put in will cancel out all of the money that they have taken out of their business, and if there is any money that they have taken out in surplus, they need to declare that as salary or dividends.
While entrepreneurs can overhear corporation for short period of time, it is not advisable says Edmonton bookkeeping, because it since corporations and entrepreneurs are considered separate entities, Canada revenue agency can consider that loan liability, and request that the entrepreneur pays their corporation interest on that amount.
When entrepreneurs took out more money than they put into their business, they can declare it as salary or dividends, which will put the balance of their shareholder loan back to zero, and they can start keeping track of the money all over again. The decision on how they claim that money becomes a tax question that is best answered with a meeting with their accountant to figure out the most efficient way to claim that income so that they are paying minimal amounts of taxes on it.
Edmonton Bookkeeping | Salary Versus Dividends
If at the end of the year, an entrepreneur has discovered that they have taken more money out of their business for personal use than they put back into it, Edmonton bookkeeping says they need to figure out how they are going to declare that they have taken that money out of their business. This is a tax question, and understanding the difference between salary and dividends, can help entrepreneurs understand why it needs to be strategized.
Business owners should understand that a dividend is a way that their corporation distributes the prophets of their business. Dividends also show up on the balance sheet of the business, instead of the income statement, and are not considered an expense of the business when they are paid out says Edmonton Bookkeeping.
Salary is the most common way for entrepreneurs to get rid of the shareholder loan account amount, however, when an entrepreneur takes a salary out of their business, it decreases profit of the business which is important they have the debt looking at their profit and loss statement. However, salaries also decrease the profit of the business and minimize the bottom line. Edmonton bookkeeping says that if an entrepreneur is planning on selling the business in the next few years, this might negatively impact how the business looks to an investor. Also, when an entrepreneur claims salary, they need to factor in the income taxes, CPP and EI that they have to pay on the entire amount of salary that they are claiming.
Because of how different salaries and dividends look on the balance sheet and income statement of the business, and how they can impact things like paying taxes, and the profit of the business, making the decision needs to be done with the competent accountant who is going to take several things into consideration in addition to all of those factors. Other things they will need to know, include is the entrepreneur the sole owner of the corporation or they have additional shareholders? Is the entrepreneur depending on the money from the corporation in order to support their household? By taking into consideration all of the various factors, accountants can come up with a strategy on how an entrepreneur is going to claim they have taken that money out of their business. It is rarely a hundred percent salary or a hundred percent dividends and is most often a mix of the two depending on all of the variables.
When entrepreneurs are starting their business, they should endeavor to keep their personal transactions separate from their corporate accounts, with separate business accounts and credit cards, but by learning how to keep track of the money in their shareholder loan accounts, can help them minimize the taxes that they have to end up paying when they declare the money that they have taken out of their business as salary or dividends. This efficient tax strategy can help minimize additional taxes that an entrepreneur would have to pay on the amount that they have taken out of their business.