Keeping track of all of the various shareholder loan account amounts that entrepreneurs have their business is extremely important says Edmonton bookkeeping, even very early on in their entrepreneurship. It is extremely important because 80% of all entrepreneurs end up their personal finances to pay for business expenses, or to pay personal expenses with their money from their corporation. Because this is so common, entrepreneurs need to learn how to track it properly, so they can end up the very clean and easy to read shareholders loan account.
The shareholders loan account is the accounts that a set up in the balance sheet of the business, in order to track all of the various transactions that an entrepreneur has taken out of their business for personal use, and they can also track all the times that they will put money into their business from their personal accounts. Edmonton bookkeeping says this is very important to keep track of, because at the end of their year, an entrepreneur will subtract the amount of money that they have put into their business from the amounts that they have taken out, and the amount that sloped over is the amount that they need to pay taxes on.
Entrepreneurs goal will be to have the least amount of money at their shareholders loan account that they need to pay taxes on. In fact, Edmonton bookkeeping says that the best strategy would be for entrepreneurs to not use their corporation for personal expenses, but it is often unavoidable. Therefore, least amount of money that they have taken out of the corporation is the goal.
Some entrepreneurs believe that they are going to be able to keep that money in their shareholders loan account, and avoid taxes on it for this year, and hopes that they are going to be able to put more money into their account and bring down the amount of money that they owe taxes on. However, this can be very dangerous because Canada revenue agency can order an entrepreneur to pay interest on that amount. The reason why that is possible, is because a corporation is considered a separate legal entity for tax purposes.
An entrepreneur also needs to keep in mind that this is only necessary if they have unincorporated business. If they own a proprietor, they do not have shareholders, and therefore no shareholders loans. All the money that they take out of their business, needs to be tracked so that they can claim it on their income tax as income.
By understanding why it is important to keep track of all the various amounts that they take out of their business as well as put in personally, entrepreneurs can end up with a very easy to understand shareholder loan that they can create a very efficient tax strategy around.
Edmonton Bookkeeping | Various Shareholder Loan Transactions
Since 80% of all entrepreneurs end up mixing up the personal and business finances together says Edmonton bookkeeping, it is very important that they keep track of all of those transactions in a shareholder loan account. The most advisable situation is for entrepreneurs to keep their personal transactions and corporate transactions separate, but often it is not possible. Especially when an entrepreneur needs to use their personal finances in order to fund business purchases, or if an entrepreneur needs to take money from the corporation in order to help pay their rent.
Various transactions that can be tracked with their shareholder loan account can include all sorts of things from taking money out of their RRSPs in order to pay payroll, taking money out of their savings account in order to make a loan payment says Edmonton bookkeeping, using their personal credit card to pay an invoice of a corporation. Also, transactions such as writing a business check to pay their mortgage, using their company debit card in order to buy groceries. All of these various transactions need to be accounted for very carefully in the shareholders loan account, as well as with To receipts notes attached.
The most important reason why, is because if an entrepreneur has taken more money out of their bank than they have put in, then they are going to need to pay taxes on the surplus that they have taken out of their business. By coming up with an efficient tax strategy alongside their accountant, entrepreneurs can minimize the taxes that they pay using a mixture of both salary and dividends. Edmonton bookkeeping says that the difference salary and evidence is huge, and the most efficient tax strategy is generally a mix of the two. Dividends are the amount that the company has declared as profits in order to distribute the profits. Dividends show up on the balance sheet of the business and not the income statement. Dividends exist solely to help an entrepreneur distribute the earnings of their corporation.
The salary on the other hand is actually seen as an expense of the business, so therefore Edmonton bookkeeping says that it decreases the profit and the bottom line. If an entrepreneur is trying to sell their business at any point in the future, they are going to want to minimize the amount of salary that they take, in order to help the prophets look very robust to potential buyers. Salary also needs to have source deductions applied to it. So the more salary that an entrepreneur claims that they have taken, is going to increase the amount of source deductions that their corporation is going to have to pay Canada revenue agency at the end of the year. Source deductions like income tax, CPP and EI are all going to apply for that amount.
When entrepreneurs come up with efficient tax strategy with their Edmonton bookkeeping company and accountant, they can minimize the amount of taxes that they have to end up paying on the amounts that they have used for personal purposes throughout the year this is very important to do, to minimize how much money an entrepreneur has to pay to CRA at the end of their fiscal year.