Understanding how shareholder loan accounts work can significantly help entrepreneurs minimize the taxes that they pay on money that they have taken out of their business says Edmonton bookkeeping. Since 80% of all entrepreneurs end up using personal finances at some point to finance their businesses, and business owners also take money out of their business, is very important that they learn early on how they are shareholder loan accounts work, so that they can minimize the taxes that they have to pay, and avoid penalties.
The shareholder’s loan account is an account that a set up in the financial statements of a corporation. It is set up in the liability section of the balance sheet to help the entrepreneur keep track of all of the money that they have taken out of their business personally, as well as all of the money that they have put into their business personally as well. Proprietorships do not have shareholders loan accounts, and anything that they take out of their business affects the owner’s equity and must be declared on the business owner’s personal taxes.
Since the corporation is a separate legal entity from the business owner, anything that the business owner takes out of the business to use personally is counted as a shareholder transaction. If the take cash out for personal use, if they use it to pay household bills, to buy meals or groceries that all should be considered a shareholder transaction. Also, if an entrepreneur uses their personal finances in order to pay business expenses, is also a transaction that should be entered into the shareholder’s loan account.
If an entrepreneur takes more money out of the business then they put into it, then that technically means they owe their corporation. They should clear that amount in a timely manner, but Edmonton bookkeeping says that entrepreneurs can owe their corporation for up to one year. If they owe their corporation for longer than that, Canada revenue agency may step in and request that the entrepreneur pays interest on the amount that they owe, since the business owner and the corporation are considered separate legal entities. In order to help entrepreneurs avoid getting charged interest on the amount that they owe their corporation, they should always ensure that they are clearing their shoulders loan account by their fiscal year-end.
In order for an entrepreneur to clear their shareholder loan account, when they have taken more money out of the business then they contributed, though either has to declare it as a salary or as dividends, in order to bring the balance of the shareholder’s loan back to zero. How they should determine how they declare that money, should be a strategy that they come up with together with their accountant. Once they have declared how they take in the money out of their business, it clears the shareholder’s loan account, and business owners can start keeping track of the money that they have taken out or put in all over again.
When entrepreneurs learn how to manage their shareholder loan accounts, they can significantly minimize the taxes that they have to end up paying on money that they have taken out of their business.
Edmonton Bookkeeping | Understanding Shareholder Loan Accounts
As entrepreneurs operate their business and take money out of their business to pay for household expenses says Edmonton bookkeeping, they need to learn how to do so in such a way that has them minimizing the taxes that they pay. Understanding what shareholders loan account is, is the purpose of it can help entrepreneurs do this efficiently.
The shareholder’s loan account is how an entrepreneur keeps track of all of the money that they not only take out of their business personally but put back into their business if they are paying business expenses out of their personal account. One of the most important decisions that an entrepreneur will make, is how to pay themselves from their business. At some point, all business owners will need to take money out of their business in order to live. There is two different ways that entrepreneurs can take money out of their business says Edmonton bookkeeping. They can either take a salary or take dividends.
How an entrepreneur would decide if they should take a salary, dividends or a mixture of the two, is a strategy that they should work with their accountant on. There is many differences in both, both in the rates that it is taxed at, and also how it affects the balance sheet and income statement of the corporation. There are several factors that the accountant will take into consideration when making a decision with the entrepreneur. How much money the business has made in a year, and if it is turning a profit. Also, the personal factors of the entrepreneur’s situation also help make that decision. Do they have business partners that are also needing to make money or are they the sole owner of the corporation? Are they using this money in order to support their family?
A dividend is how the corporation distributes its profits. The dividend also shows up on the balance sheet of the business, and when an entrepreneurís business starts making earnings, dividends are how this money it is dispersed. Salary on the other hand, is considered an expense, and it decreases the profit of the business says Edmonton bookkeeping.
Important things that entrepreneurs need to understand, is that salary will also need to have an income tax, CPP and EI deducted from the amount, so that is going to be an additional expense to the entrepreneur. Also, because it is considered an expense, it decreases the profit of the business, which might not be desirable if an entrepreneur is trying to sell their business, because it can impact how profitable business looks to investors.
By understanding the difference between salary and dividends, entrepreneurs can help their accountant to make the decision on how to make money out of their business and in the most tax-efficient manner.