Learning how to use the shareholder loan account of the business is extremely important to entrepreneurs says Edmonton bookkeeping. Not only do 80% of all entrepreneurs use personal finances in order to help pay business bills, but even more entrepreneurs are also taking money out of their corporation on a regular basis as well. Entrepreneurs need to keep track of all the money that they take out of the business as well as put in so that they can pay the appropriate amount of taxes on that money at the end of the year.
The reason why entrepreneurs need to keep track of this is that they are a corporation and themselves are considered to separate legal entities. Business owners must pay back all the money that they owe a corporation, or tell the government that they have taken money out of their business so that they can pay taxes on it. While it is most preferred for entrepreneurs to completely avoid making any personal transactions into or out of their business, it is not only sometimes unavoidable but is a very common practice by entrepreneurs. Therefore, keeping track of it carefully is vital.
How entrepreneurs would keep track of their shareholder loan amount, is in the balance sheet of their financial statements, underneath the liability section. All the various transactions that they were made whether it is taking cash out of a bank machine, using their business bank card for personal purchases, or even using a personal credit card, to pay business expenses. All of these amounts need to be kept track of very carefully so that the end of the year Edmonton bookkeeping and their accountant can figure out if they have taken more money out of their business than the profit.
Many entrepreneurs often want to owe their corporation for the next year, because they either cannot afford the taxes that are going to have to pay on the amount that they have taken of their business or, they think they are going to be able to put more money back into their business, that will negate the amount that they have taken out. Edmonton bookkeeping says that while this is possible, it is also not advisable, because the longer they owe their corporation, the more likely CRA is going to be able to come back to the business owner wondering why they are not paying interest on the loan their business is given them. Since they are considered separate entities, legally an entrepreneur should be paying interest to their business. CRA may demand that they pay their corporation interest, dating back to the first time they took money out.
By understanding how the shareholder’s loan account works in their business, and why they need to keep track of their personal expenditures, business owners can ensure that there keeping track of all the money that they have taken of their business, so they can pay the appropriate taxes at the end of the year.
Edmonton Bookkeeping | Understanding Shareholders Loan Accounts
When an entrepreneur takes more money out of their business then they put into it says Edmonton bookkeeping, they need to declare that money as income on their personal tax return to Canada revenue agency. They have two different ways that they can do this, and should be a decision they make their accountant, to minimize the taxes that they have to end up paying on the amount.
While it is most advisable for entrepreneurs to avoid making personal transactions into and out of their corporate bank accounts, it is very common, and sometimes unavoidable. Edmonton bookkeeping says that any time an entrepreneur takes money out of the business for personal reasons, they need to end up paying personal taxes on it. Therefore, a much better and more tax-efficient approach is for entrepreneurs to use their businesses to save money and help it grow. This is also an effective way to helping the business thrive by keeping the money in its business where it can grow.
The two different ways that entrepreneurs can pay themselves is through a salary or through dividends. Typically, accountants will figure out a tax-efficient mix of the two. Edmonton bookkeeping says it is rarely claimed as all salary or all dividends. It is a fairly complex equation, and the accountant will factor in several things including the personal circumstances of the entrepreneur, as well as factors of the business. They may ask questions like if they are depending on the money from the corporation to support their family, or if they have income from other sources. It also might ask if they have business partners or if they are the sole owner of the corporation. All of these can help advise the accountant on the most efficient way to claim that money.
Business owners should understand that salaries and dividends are considered very different in their business accounting. Edmonton bookkeeping says that a dividend is the amount of money that a company disperses because they have profited. Dividends show up as an asset on the balance sheet of the financial statements, instead of on the income statement.
Entrepreneurs should also understand that salary considered very differently. It is the expense of the business, therefore it negatively impacts the profit of the business. Edmonton bookkeeping says this is very important if an entrepreneur is planning on selling the business at a later date because they want the bottom line of the business to look as positive as possible to a future investor. Another thing that entrepreneurs need to take into consideration when they are claiming salary, is that all the source deductions that must be paid apply to this amount to, even if they took the amount out of their business earlier. While it is the most common way for entrepreneurs to get rid of the shareholders’ loan amount, and also can negatively impact their business finances, because they will have to pay taxes on the business side as well.