Every time an entrepreneur uses corporate money for personal use, Edmonton bookkeeping says they need to keep track of it very carefully and what is called a shareholder loan account. The reason for that is because all of the money that an entrepreneur takes out of their business, they have to pay personal taxes on. The best practice of all is for entrepreneurs to avoid making personal transactions in their business. However this is not always possible, and 80% of all entrepreneurs do this occasionally, so it becomes very important for entrepreneurs to learn that they need to keep very good track of this, so they can include all transactions in their shareholder loan account.
All transactions both in and out of the business that is personal should be included in the shareholder transactions. This includes not just when an entrepreneur uses their business funds for personal use, such as using the business bank card to take money out of her personal spending or using their business bank account or credit card to make purchases like for meals or groceries. But says Edmonton bookkeeping, it is also for an entrepreneur to keep track of if they use personal finances to fund business expenses like taking money out of their RRSPs to cover payroll or using their personal credit card to pay a business expense.
Edmonton bookkeeping says at the end of the year, an entrepreneur must calculate the amount of money that they have into their business, from the amount that they have taken out of their business for personal use. If there is more money than they have taken out of their business then they put in, they either over that money back to their corporation, or they need to declare it as income to the government, so they can pay the appropriate amounts of tax on it.
Many entrepreneurs often wonder if they can leave that money in their shareholder’s loan account from year to year. They either want to avoid paying taxes, or they believe they can put more money into their business that is going to subtract from the amount of money that they have taken out of their corporation. While this is possible says Edmonton bookkeeping, it is also not advisable. The biggest reason for this is since entrepreneurs and their corporations are considered separate legal entities, Canada revenue agency may wonder why the entrepreneur has taken a loan from their corporation and is not paying interest. They may step in and require the entrepreneur to pay that interest back to their corporation and more. Rather than risk having to pay even more in CRA penalties, entrepreneurs should just claim the money as income, pay the taxes and reset their shareholder loan balance back to zero.
When entrepreneurs understand how important it is to keep track of their shareholder loans, they can ensure that they are keeping very good track, so that they can minimize the amount of money that they have to pay in personal taxes on the money that they have taken out of their business.
Edmonton Bookkeeping | What Are Shareholder Loan Accounts
When an entrepreneur gets to their fiscal year and says Edmonton bookkeeping, and calculates the amount of money that they have put into their business as well as taken out for personal use, if they discover that they have taken more money out of their business, they need to claim that as income on their personal taxes. They have a couple of options on how they can do that, and is a decision that is best made with their accountant, taking several factors into account.
An entrepreneur should sit down with their accountant at the end of the year, in order to review their personal and business finances so that the accountant can figure out the best tax plan for their business. They going to ask the entrepreneur several questions such as if they are the sole owner of their corporation, and if not what percentage of shares do they end their business owners hold. They went to ask them if they are planning on selling the business in the next couple of years, and if they are depending on the money that they get from their business to support their family, and if they have any additional revenue sources that are coming into their household. All of these factors are going to help advise an accountant on the best way to claim the money that they have taken out of their business on their taxes.
Edmonton bookkeeping says there is two possible ways, either salary or dividends. However, it is almost never the best tax plan to either claim 100% as a salary, or 100% as dividends. It is usually a mixture of the two, depending on the circumstances of the business, the entrepreneur, and how much money they have taken out of their business. This circumstance of the business and the entrepreneur might change from year to year, therefore it is extremely important that entrepreneurs have this conversation every single year with their accounting team says Edmonton bookkeeping.
Entrepreneurs should also understand the differences in salary and dividends, so that they can understand why they need to make a very strategic decision. The dividend is the amount that the company has declared is profits in the last year of the business. Dividends show on the balance sheet as an asset to the business and is the way that businesses distribute the earnings of the corporation. Personal taxes must be paid on it, but there is almost no negative impact to the business.
Salary, on the other hand, is considered an expense of the business, and while it is the most common way for entrepreneurs to disburse the amount that is surplus in the shareholders’ loan account, taking salary decreases profit. This may be advantageous for certain tax reasons, but if an entrepreneur is planning on selling their business, they may want to minimize the salary that they take, so that profit of the business can look as positive to potential investors in the future. Business owners also need to understand that paying themselves salary means that all of the source deductions that typically apply will also have to be paid to CRA. This includes income tax, CPP and EI on the total amount that is being claimed as income.