It is very common that entrepreneurs and of having to take money from their business to pay household expenses from time to time says Edmonton bookkeeping. While most entrepreneurs would be advised to minimize how often they take money out of their corporation and recommend keeping separate bank accounts and credit cards for this purpose, is unavoidable sometimes that an entrepreneur may need to take money out of the business for personal use, and also use their personal finances to pay business expenses. When this is the case, understanding what a shareholder loan account is, and how it works can be extremely important.
Anytime an entrepreneur takes money out of their business for personal use or uses personal money to pay business bills, that is considered a shareholder transaction. A shareholder loan account is set up in the balance sheets of the business, under the liability section in order to keep track of all of these amounts says Edmonton bookkeeping. At the end of the year, an entrepreneur will calculate all of the money that they have taken out of the business against all of the money that they have put into their business, and if they have taken out more money than they have put in, they need to declare if they have taken it out as a salary or as dividends. Edmonton bookkeeping says that if they have put more money into the business then they have taken out, then that is money that the corporation owes them.
While it is possible for an entrepreneur to owe money back to the corporation for a short period of time, Edmonton bookkeeping says that it is not advisable for an entrepreneur to owe money to their business for a longer period of time. The reason is that when an entrepreneur owes their corporation for a longer period of time, it gets considered a long-term liability. If Canada revenue agency sees that an entrepreneur owes the corporation a long-term liability, they may question why the entrepreneur is not paying the corporation interest. This is because since the corporation and the entrepreneur are considered separate legal entities, a business owner should be paying that interest. They may assess the business owner, and clawback the interest and expect them to pay the business to years of interest while paying additional interest and penalties.
If an entrepreneur owns a proprietorship, they do not need to worry about the shareholder loans, because this is a function of a corporation. Any proprietors that take money out of their business just needs to be declared on their personal taxes as income and then pay personal taxes on the amount that they have declared that they have taken out of their business.
By understanding that all of the money that they take out of their business, and put into the business needs to be kept track of, can help entrepreneurs ensure that they are attracting that money carefully. At the end of the year, if they have taken out more money than they put in, understanding how to deal with that money efficiently is important and can help entrepreneurs itemize the taxes that they pay on it.
Edmonton Bookkeeping | Understanding Shareholders Loans
Any time that an entrepreneur takes money out of their business for personal use, or uses their personal finances to pay for business expenses, Edmonton bookkeeping says that that is considered shareholder transactions. When entrepreneurs understand that this needs to get tracked very carefully because if they have taken more money out of their business at the end of the year than they have put in, they need to declare to the government that they have taken that money from their corporation and pay taxes on that.
At this fiscal year end, an entrepreneur must calculate the amount of money that they have taken out of their business and compare it to the money that they have put into their business. If they have taken more money out then they put in, they need to decide if they are going to declare that money as salary or dividends. Edmonton bookkeeping says that this should be a decision made with an accountant because there is several factors that need to be considered in order to determine what is the most beneficial way to claim it.
Although salary is often the most common way for entrepreneurs to declare the taken money out of their business, in order to get rid of the shareholder loan account amount, however when an entrepreneur takes a salary, they are considered an employee of the business and income taxes apply. Not only does the entrepreneur have to declare a salary that they have taken, they also owe Canada revenue agency all of the income tax, EI and employer plus employee contributions to CPP. Depending on the amount of money that is, it could be very cost-prohibitive.
Entrepreneurs also need to understand, that taking a salary is considered an expense of the corporation, so the more salary that is claimed, the more it affects the prophets of the business and decreases the bottom line. This is something that an entrepreneur is going to want to take into consideration if they are planning on selling the business in the next few years, because they want their business to look like it has the most profit possible, so it can look good to an investor says Edmonton bookkeeping.
A dividend on the other hand, is how the company distributes the prophets of the corporation. Dividends show up on the balance sheet of the business, instead of the income statement, and is not considered an expense of the corporation, because it is a way that they distribute the earnings. Therefore, if an entrepreneurís business is not turned a profit, it can be difficult to claim a dividend.
By understanding the difference between salary or dividends, can help entrepreneurs come up with an efficient tax strategy with their accountant, on how to claim that they have taken money out of their business.