When an entrepreneur is setting up their corporation for the very first time, Edmonton bookkeeping says that entrepreneurs might be advised by their accountant to set up a holding company in addition to their operating company. Many business owners do not understand that they are actually owning two corporations within one company. Therefore, they do not end up keeping accurate records of all the various transactions that they have in and out of their business, because they assume it is all for one company. However, if they do not keep accurate records, their Edmonton bookkeeping company will never be able to know which corporation should be getting each transaction. Not knowing this can end up causing problems when their bookkeeper goes to do their fiscal year-end.
The first thing that an entrepreneur needs to do when they find out that they own two corporations is finding out what a holding company is. What it actually is, is a business owner that owns a corporation, and that that corporation opens another corporation. It is also called a parent corporation or a limited liability company. There are many reasons why an accountant would recommend an entrepreneur would have a holding company for their corporation, that this is common when they own a risky business, or they want to add a layer of protection to themselves.
Once an entrepreneur understands that when they do not own the operating company, but they own the holding company, business owners will gain a deeper understanding of how it protects them. Once they understand that, they can understand that there might be intercompany transactions happening. Transactions that will allow them to transfer money to pay payroll another transaction might be an entrepreneur that needs to transfer money into their shareholder’s loan account. Ultimately, regardless of what the reason is, if they are not keeping accurate records of what was happening with that transaction, it will cause problems for their Edmonton bookkeeping company.
For example, if an entrepreneur sends their Edmonton bookkeeping company a deposit, that bookkeeper might assume that the deposit is paying an invoice for my customer to the operating company. However, if that is not the case then not only is the operating company increasing their profit falsely, but the holding company also ends up being incorrect as well.
At the end of the year, a business owner needs to understand that the holding company and the operating company need to balance each other. Since both corporations may not necessarily have the same fiscal year-end, it is very important that not been or is keeping an accurate record so that their Edmonton bookkeeping company can keep both corporations matched every single month. Not only will that help an entrepreneur ensure that they have the best financial statements in order to make financial decisions in their business, but it will ensure that everything is accurate when they do their financial year ends.
When under partners understand how important it is to keep track of all transactions, even if they may not understand it, they will be able to comply, ensuring that their Edmonton bookkeeping company is doing the books correctly, and making their financial year ends accurate and go smoothly.
Edmonton Bookkeeping | Understanding Holding Companies
Many business owners struggle with understanding basic business finances according to Edmonton bookkeeping. For example Intuitís, the makers of accounting software QuickBooks surveyed small business owners in order to understand what they know about business finances. The respondents were asked questions about what the role of a balance sheet is, what accruals are, and how they can improve the cash flow in their business. Out of all of the respondents, 82% scored lower than 70% on the test. This shows that many entrepreneurs struggle with understanding their business finances, and this can be exacerbated when an entrepreneur owns a corporation that is holding another corporation.
Ultimately, the most important thing that an entrepreneur needs to keep in mind when they own a holding company that owns a corporation, is that they need to keep accurate records of all of their financial transactions in their business. Even if they are not completely understanding exactly what the transactions mean, if they are able to communicate with their Edmonton bookkeeping company what the transactions are for, can help their bookkeeper and up with accurate monthly financial statements for the business owner, and help keep both operating and holding companies accurate so that they balance at the end of their as well.
Common mistakes that can be avoided with great communication between a business owner and Edmonton bookkeeping company is when a bookkeeper gets a deposit if they are not told what it is for, they may think that it is all to be deposited into the operating company. This is not always the case, and it can end up with both corporations is being extremely unbalanced from each other.
Another very common mistake that happens on a business ownerís bookkeeping if they are to communicating with their Edmonton bookkeeping company, is when they send the expenses of one corporation and it gets applied to another. This can end up creating all sorts of havoc that may be even more difficult to sort out. Therefore, business owners need to be very clear what they were doing with those expenses when they were incurred so their bookkeeper can book them properly.
The last most common error that happens, is when an entrepreneur sends information about a transfer, and the bookkeeping company thinks that it should be applied to the shareholder loan. This will end up with an entrepreneur paying far more taxes then they need to, which could be financially crippling. In order to avoid these common mistakes, an entrepreneur can simply keep accurate records of all transactions.
Business owners do not need to understand the different structures of their company as long as they are keeping accurate record, and hire and Edmonton bookkeeping company and an accountant that understand that for them. They may have had this structure in order to protect themselves, or to give them more control over how to pay themselves, so rather than avoid this structure, they should let the experts that they hired do their very good at so that a business owner can spend their time and energy focusing on growing their corporation.