Most entrepreneurs do not understand the tax implications of taking money out of their business personally until they have done it and reached their fiscal year and says Edmonton bookkeeping. While it is most advisable for entrepreneurs to avoid taking money out of their business personally whenever possible, is often unavoidable, and when business owners do, they need to know how to account for that money, so that they can work on the most efficient tax strategy on how to declare that money with their accountant.
Any time an entrepreneur either takes money out of their business for personal use or puts money into their business from their personal account, it needs to be kept track of in a section on their balance sheet called a shareholders loan. This is where entrepreneurs can keep track of all of the money that they have taken out of their business for personal use, and put back into the business. All transactions in or out, if it is personal use should get tracked here. At the end of the year, all of the money that they have put into the business is subtracted from the amount that they have taken out, and if there is any amount left over that the business owner has taken out of their business, that is considered a shareholders amount surplus.
It is not advisable for an entrepreneur to have a surplus on their books for a long period of time, because since that is money that an entrepreneur technically goes back to their corporation, the longer it is outstanding on their balance sheet, the more Canada revenue agency will wonder why the business is not getting interested on the amounts. The reason for this, is because since the corporation and the entrepreneur are two separate legal entities if the entrepreneur owns the business, they should be paying interest says Edmonton bookkeeping.
If an entrepreneur is overdrawn on their shareholders’ loan account, Canada revenue agency may see this, and clawback the interest, and expect the entrepreneur to pay the two years of interest on the overdrawn amounts. In addition to that, they could get assessed additional interest and payments. In order for an entrepreneur to avoid having to pay interest on the amounts that they have taken out of their corporation, they should simply declare that they have taken the money out either as salary or dividends from their business.
When business owners declare that they have taken money out of their business either as salary, or dividends, that returns the shareholder’s loan amount back to zero, and they can start from a clean slate. Making the decision on what to declare, is a tax decision best made with their accountant says Edmonton bookkeeping.
When entrepreneurs understand and learn how to use their shareholder’s loan account efficiently, they can ensure that there avoiding paying additional taxes on the amounts that they take out of their business. Although it is advisable for entrepreneurs to avoid taking out money from their business for personal use, in the circumstances that it is unavoidable, shareholder loan account can help keep an entrepreneur organized, and minimize the taxes that they pay.
Edmonton Bookkeeping | Taking Money Out Of The Corporation Efficiently
It is very common for entrepreneurs to be taking money out of their business for personal use says Edmonton bookkeeping. When they do, they need to keep track of it in a shareholders loan account until there fiscal year-end. If they have taken more money out of their business then they have put in, they need to declare that they have paid their themselves through salary or through dividends.
Understanding what the difference is between salary and dividends can help entrepreneurs decide which is the most efficient way to declare the taken money out of their business. It is a fairly complex issue, that should be made alongside their accountant, who can help them navigate all of the factors that need to be understood before making the decision says Edmonton bookkeeping.
The dividend of business is the amount that the company is declared in order to distribute the prophets. Dividends are not considered an expense of the corporation, and when an entrepreneur takes dividends, it does not negatively impact their bottom line. Dividends on the other hand, show up on the balance sheet of the business.
Salary, on the other hand, is how an entrepreneur pays themselves as an employee, and all payroll taxes must come off of this amount. It is also considered an expense of the business, and can negatively impact the profit of the business. However, this is the most common way for an entrepreneur to get rid of the shareholder’s loan account surplus. When the decision to pay themselves a salary, they should ensure that they also have enough money in their corporation to pay the accompanying taxes including income tax, employer and employee contributions to CPP, and EI.
There many things that entrepreneurs need to take into consideration along with their accountant in order to figure out which way to declare the taking money out of their business. It is most often a mix of the two, it is very rare that an accountant will come up with a strategy that has the entrepreneur paying either a hundred percent dividends or 100% salary to themselves. The accountant will ask an entrepreneur several questions that can help them make the decision, such as are they using this money to support themselves or their family, and are they the soul owner of a corporation or do they have business partners. When all of the various factors have been taken into consideration, and an accountant will be able to let the entrepreneur know what strategy is best for their personal situation.
By keeping track of all of the amounts of money that they have taken out of their business, entrepreneurs can decide with their accountant at the end of the year how they should declare the taken money out of their business so that they can do so in the most tax-efficient manner possible.