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While the most advantageous thing for an entrepreneur to do is to avoid taking any personal transactions into or out of their corporation says Edmonton bookkeeping, 80% of all entrepreneurs end up using personal finances in order to fund their business. Any time an entrepreneur puts personal money into their business or takes money out of their business for personal reasons such as to pay household expenses, they need to keep track of it in what is called a shareholder loan account. The reason is, at the end of their fiscal year and entrepreneur needs to calculate the amount of money that they have taken out of their business compared to the money that they were in, and if they have taken out more money than put in, they need to declare that money as income or pay it back to the corporation.

The shareholders’ loan account is kept track in the liability section of their balance sheet. This is used expressly for entrepreneurs to keep track of all the money that has personally come out of the business or got into it. Business owners need to ensure that they are keeping all of their receipts when there they have made personal purchases with their business bank card, or done things like use their personal credit card in order to pay a business bill. By keeping a very good record, entrepreneurs can avoid paying additional taxes on corporate expenses that were mistakenly accounted in the shareholders’ loan account.

At the end of the year, if an entrepreneur has taken more money out of their business, they need to pay taxes on that says Edmonton bookkeeping. Although, many entrepreneurs do not think they can pay the taxes, or they believe that they can put more money into the business in the next year, to bring that shareholder’s loan account down to zero. Edmonton bookkeeping says that while this is possible, it is not advisable, simply because the longer the amount of money that an entrepreneur owes their corporation, the more it will be considered a long-term liability by Canada revenue agency. They why the entrepreneur has received a loan from their business and is not paying interest. Since the entrepreneur and their corporation are considered separate legal entities, this is a definite possibility. Canada revenue agency may order an entrepreneur up to pay interest back to their corporation including penalties and additional interest as well.

At the end of the year, entrepreneurs need to make a decision with their accountant on the best way to claim that money as income on their personal tax return. The decision is essentially through salary or dividends. By discussing this with their accountant, they can come up with the most efficient tax strategy for the entrepreneur, which minimizes the amount of taxes that they have to end up paying on the money that they have taken out of their business. By doing this, entrepreneurs can ensure that they have the most efficient tax plan to help save money in their business.

Edmonton Bookkeeping | Shareholders Loan Account Best Practices

If an entrepreneur has taken more money out of their business then they have put into it at the end of the year, through shareholder loan transactions, Edmonton bookkeeping says that they need to claim the amount that they have taken out on their personal tax return to Canada revenue agency. The reason is, that they have to pay taxes on the money that they have taken out of their business. However, there is two different ways that entrepreneurs can do that, and with their accountant, they can figure out the best mix of how to claim the money they have taken out of their business.

Business owners can claim that they have taken salary or dividends. They are both very different and have extremely different implications both personally and for their business finances. An accountant will be able to help make the most efficient tax plan, depending on several factors including the personal finances of the entrepreneur as well as what their business finances look like. Edmonton bookkeeping says that entrepreneurs should get ready to answer questions such as they have income coming from additional sources, if they have business partners or if there the sole owner of the corporation, that there depending on the money to support their family.

While salary is the most common way for entrepreneurs to get rid of the shareholder’s loan account amounts, there are many things that entrepreneurs need to understand about taking a salary. The first of which is salary decreases the profit in their business, because it is considered an expense of the business. Edmonton bookkeeping says that this is very impactful if an entrepreneur is planning on selling their business, that they are going to want to avoid taking large amounts of salary, is that it does not negatively impact the bottom line of the business on paper so that the business can look impressive to a future investor.

Something else for entrepreneurs to consider when they are considering claiming the money that is taken out of the business as salary. Edmonton bookkeeping says that for all of the salary that they claim, entrepreneurs also owe all of the typical source deductions that would be normally taken off of an employee salary. This means not only the employer and employee contribution of CPP but also EI and income tax. Depending on how much money an entrepreneur needs to claim, this may be very cost prohibitive to the business, to have to pay all of the source deductions on their salary at the end of the year.

On the other hand, dividends are dealt with much differently says Edmonton bookkeeping, because they are not considered expensive the business, but instead a distribution of the prophets. The dividends show up on the balance sheet as an asset instead of negatively on the income statement. Still, by declaring dividends, an entrepreneur will still need to pay personal taxes on that amount.

When entrepreneurs understand how taking money out of their business through their shareholders loan account affects their business at the end of the year, they can endeavor to avoid making personal transactions in their business, and when they do, ensure it is very necessary, and that there keeping very good track of it so they can avoid paying taxes on amounts that were improperly attributed to their shareholder loan account.