Entrepreneurs need to understand how to use their shareholder loan account says Edmonton bookkeeping, so that they can keep track of all of the money that they have taken out of their corporation personally. The money that they have taken out at the end of the year must be claimed as salary or dividends so that entrepreneurs can pay the appropriate amount of taxes on what they have taken from their business. Since 80% of all entrepreneurs will either use their personal finances to fund their business or take money out of their corporation in order to pay their household expenses or both. Keeping good track of this money is important, so entrepreneurs can plan and effective tax strategy at the end of the year.
Ultimately, the most advisable situation is for entrepreneurs to not ever use their corporate money for personal use, and to not use their personal finances to fund their corporation. The reason for this, is because when an entrepreneur uses the money in their business to save and grow their money, they cannot only keep their business alive, but also save money for their future.
Every time an entrepreneur takes money out of their business for personal use or puts their personal finances into their business they should keep track of it on their balance sheet in a section called the shareholder loan account. It will exist in the liability section of their balance sheet, in its design is to keep track of all of the money that an entrepreneur puts into and takes out of their business. At the end of the year, all of the money that they have put into their business is subtracted from the amount of money that they have taken out of their business, and if they have taken out more money than put in, that means the shareholders loan account is overdrawn, and they either have to declare it as salary, dividends or put that money back into their corporation. Edmonton bookkeeping says that it is not realistic to expect entrepreneurs to put the money back into their business, because they likely took it out of their business in order to help them pay household expenses and live.
Many entrepreneurs believe that they can leave their shareholders loan account as withdrawn for a year, and hopes that they can either afford to pay the taxes on it at a future date, or that they will put more money into their business then they take out of it, and therefore can avoid paying any taxes on it in the future. Entrepreneurs should avoid doing this whenever possible says Edmonton bookkeeping, because if they are overdrawn for a year, Canada revenue agency may consider it a long-term liability and order the entrepreneur to pay interest to the corporation for the money that they have essentially borrowed from their business. The reason why this is possible is that entrepreneurs and their corporations are considered separate legal entities.
Edmonton Bookkeeping | Understanding Salary And Dividends
When entrepreneurs take more money out of their business than they put into it says Edmonton bookkeeping, they must keep track of it very carefully, and their shareholder loans account so that their accountant can decide at the end of the year should they claim the money as a salary, dividends or both. This is a complex issue, that entrepreneurs should discuss with their accountant in order to determine the best plan.
When an entrepreneur meets with their Edmonton bookkeeping and accounting company, their way to ask several questions both personal and business in order to figure out what the best split is, whether they should take salary, dividends or a mixture of the two. They are going to ask questions like do they have business partners in their corporation, and if so what percentage of shares do they own? Do they have dependents or a spouse? They have any sources of revenue coming into their family, does their family depend on this money to live? After all of these questions are answered, the entrepreneur will look at the business finances and their personal finances to make the decision on how much should be taken as salary and how much should be taken out as dividends.
The dividend in a corporation is the prophets that the business enjoyed in the last year since this is the earnings of the business, it shows up on the balance sheet as assets. And dividends or the way a corporation is designed to distribute the earnings. However, if an entrepreneurís business did not turn a profit in the last year, an entrepreneur will not be able to claim dividends. Or, if it only made a certain amount of dividends, an entrepreneur took more money out of their corporation through the year, they can only claim up to the amount of money that they business profited.
Salary on the other hand, is considered an expense of the business says Edmonton bookkeeping. Therefore, it decreases the prophets of the business. This is the most common way for entrepreneurs to get rid of the shareholder loan account amount, but if entrepreneurs are planning on selling the business within the next five years, they should minimize how much money they are taking out as salary, simply because they want their bottom line to look as healthy as possible to appeal to future buyers. Also, it is very important that entrepreneurs keep in mind that they need to pay all the appropriate source deductions on amounts that they claim as salary. That means, that entrepreneurs need to pay the employer and employee portion of CPP, EI and income taxes. Since they have already taken money out of their corporation, they went have to come up with all of the additional tax amounts to pay out of their business corporation.
Taking all of these factors into consideration along with their Edmonton bookkeeping and accounting company, entrepreneurs can come up with a great strategy of how to claim the money that they have taken out of their business, to minimize the taxes that they have to pay on it.