The sheer number of entrepreneurs that used personal finances to fund their business says Edmonton bookkeeping, they need to understand very clearly what shareholders loan is, and how to track it effectively. Entrepreneurs who either use their corporate money to fund personal expenses, or use personal funds to fund corporate expenses, all of this needs to be accounted for and what is called a shareholders loan account. The reason why it is so important is that if an entrepreneur has taken more money out of their business at the end of the year, they can legally need to claim that as income and pay taxes to the Canada revenue agency.
The shareholder’s loan account is an account set up on the balance sheets of the business that is listed under the liability section. All amounts that an entrepreneur takes out of their business for personal use, or puts into their business from personal funds needs to be tracked here. Edmonton bookkeeping says that the reason why it is so important is that at the end of their fiscal year, an entrepreneur will have calculated how much money they have taken out of their business subtracted from the amount of money that they have put into their business. If there is more money that they have taken out of their business then put in, they need to pay taxes on that. However, it is also important because if an entrepreneur has put more money into their business then taken out, the amount that is the surplus is tax-free money that they can take out of their business any time.
Various transactions that should be considered shareholder transactions can include an entrepreneur who uses a business debit card to take cash out of a bank machine for personal use, using the debit card of the business to pay for meals or groceries, and using the corporate credit card to pay for a hotel room for personal use. Edmonton bookkeeping says that also, personal transactions such as if an entrepreneur has taken money out of their RRSPs in order to pay their payroll, or use their personal credit card in order to pay for an invoice of the business. All of these things account, and need to be kept track of very carefully.
At the end of the year, if an entrepreneur always more money to the corporation, they can either pay that money back to the corporation, or they can decide to pay the taxes on it and claim it as income. Some entrepreneurs believe that they can simply leave that amount in the shareholders loan account. Edmonton bookkeeping says that this is extremely advised against, simply because the longer an entrepreneur owes their corporation, they more it is considered a long-term liability. If this happens, Canada revenue agency is able to come in and tell the entrepreneur that they need to pay their business interest on that loan that they have taken out. Since the corporation and the entrepreneur are technically separate legal entities this is possible. Entrepreneurs need to avoid paying additional interest and penalties on their shareholders loan amount, and instead should just claim it as income, pay the taxes and eliminate the fear of additional penalties.
Edmonton Bookkeeping | The Importance Of Shareholders Accounts
Since 80% of all entrepreneurs end up using personal finances in their business as well as business finances personally, Edmonton bookkeeping says it is important that they keep track of those amounts in their shareholders’ loan account. The reason is, at the end of the year, if they have taken more money out of their business then put in, they need to come up with a strategy their accountant on how they are going to claim that money on their personal income taxes in order to pay the minimal amount of taxes possible.
Since one of the most vital roles of an accountant is to help an entrepreneur pay a minimal amount of taxes, it is extremely important that when an entrepreneur finds out at the end of the year if they have any shareholders loan accounts that they owe, that they talk to their accountant as quickly as possible. The accountant can help figure out the difficult situations of if they should claim salary, dividends or both by taking several factors into account. The accountant is going to factor in personal and business situations to help advise their tax decision. The accountant is going to ask the entrepreneur questions such as if they are married if they have dependents if they are the sole owner of the corporation and if not how many partners to they have and what percentage of the corporation did they own. Did they have additional revenue streams coming into their business, does their spouse, and did they depend on this money to support their family. They also might ask if the entrepreneur is thinking of selling the business because all of these things factor into how an entrepreneur claims this amount on their taxes.
typically, Edmonton bookkeeping says that they are going to come up with a strategy including a mixture of a percentage of salary and percentage of dividends. An effective tax strategy is rarely a hundred percent salary or a hundred percent dividends. Entrepreneurs should understand the difference between dividends and salary, so they can understand why it is a decision that is best left to the accountant. A dividend is the number of profits that a company has declared, and can distribute. This shows up on the balance sheet and not the income statement because it is not an expense of the business. If an entrepreneur claims this, they will pay personal taxes on the entire amount. However, an entrepreneur also must have made that amount of profit in their business before they can claim it.
Salary, on the other hand, is treated the same as paying salary to an employee, which means all of the typical source deductions must come off of this. That means CPP, EI and income taxes must come out of the entrepreneur’s business expenses if they claim salary. This also is listed in their income statement as an expense, and negatively impacts the bottom line. This is most important if an entrepreneur is planning on selling the business in the next few years, and they want the profit to look as positive as possible to potential investors.