It is important for entrepreneurs to learn what a shareholder loan account is in their business says Edmonton bookkeeping, because all entrepreneurs at one time or another or going to take money out of their business personally or use their personal finances to fund their business or pay bills. But how common this is, it is extremely important that entrepreneurs understand what their shareholder loan account is, and how it is used in their business.
The shareholder’s loan account is an account that is set up on the balance sheets of the business, in the liability section in order to keep track of all of the money that an entrepreneur has taken out of the business personally, as well as put back into the business. This is only necessary for business owners that have incorporated businesses. If an entrepreneur is operating their business as a proprietor, they do not have shareholders, and therefore do not have shareholders loan accounts. Anything that proprietors take out of their business simply gets declared on their personal income tax.
Entrepreneurs also need to understand what type of transactions should be considered shareholders’ loan transactions. Edmonton bookkeeping says that anything that an entrepreneur has taken out of their business for personal use should be considered shareholder’s loan transactions. If they have taken money out of their business in cash, and have used it personally, if they paid for meals out of their bank account, bought groceries, or paid personal bills is all counts as shareholder transactions. Also, what can be considered a shareholder transaction is any time an entrepreneur has put money into their business. Such as paying corporate bills from their personal bank account.
At the end of the year, Edmonton bookkeeping says that entrepreneurs need to take into consideration how much money they have put into their business, versus how much money they have taken out of their business. If at the end of the year, they have taken more money out of their business then they put in, that means the shareholder loan account is overdrawn. While it is possible for entrepreneurs to have in overdrawn accounts for a year, it is technically considered a long-term liability, and Canada revenue agency may wonder why the entrepreneur is not paying their business interest on the amount that they have borrowed from the company. Since they are both separate legal entities, the Canada revenue agency is well within their rights to request that from the entrepreneur.
Instead of having an overdrawn shareholders loan account, business owners should clear the amount that they owe the business, by simply declaring that they have taken that money as a salary or dividends in their business. How they do that, becomes a tax question that they should discuss with their accountant, in order to figure out what the most efficient tax strategy is, on how to declare they have taken that money out of their business. By doing that, entrepreneurs can be sure that they are keeping track of all of the money that they have taken out and put into their business, and paying the appropriate taxes on that.
Edmonton Bookkeeping | What Is A Shareholder Loan Account
Whenever an entrepreneur takes more money out of their business then they have put in at the end of the year says Edmonton bookkeeping, they need to make the decision with their accountant on what the most efficient strategy is to declare the taken that money. They can either declare that they have taken the money as a salary, or a dividend. The decision on which one to declare becomes at tax implication that business owners should figure out what their accountant.
Understanding the differences between the salaries and dividends can help entrepreneurs alongside their accountant figure out how they can declare the taken money out of their business. It is rarely a tax-efficient strategy for an entrepreneur to declare that they have taken a 100% salary or 100% dividends. In fact, there are so many different factors used to decide how an entrepreneur should claim they have taken the money. Including, are they the sole owner of the corporation or do they have business partners and the corporation? They need this money to support their family and live?
While declaring salary is the most common way for an entrepreneur to get rid of the shareholder loan account surplus, it is also the way that entrepreneurs pay themselves as an employee. Edmonton bookkeeping says that this means is that for that entire amount, all income taxes apply. They must pay on the amounts that they have taken a salary income tax, employer and employee contribution of CPP, as well as EI. If an entrepreneur has that money available to pay in salary taxes, then it is possible. If they do not have that money, it may be more difficult to claim a salary.
Also, salary is considered an expense of the business, and it negatively impacts the bottom line. If an entrepreneur is looking to sell the business at some point in the future, taking a large amount of salary can significantly change what the prophet looks like to an investor. An entrepreneur may decide to take more dividends out if they are selling their business at any time in the future.
Dividends, on the other hand, are how the entrepreneur distributes the profits of the business. If the business is not profiting, it can be difficult to claim dividends as earnings. However, dividends are not considered an expense of the business, because it is considered a distribution of the earnings. Therefore it shows up on the balance sheet instead of on the income statement, which can impact how the prophet looks to the business.
Ultimately, the decision on how an entrepreneur takes money out of their business if they have a surplus in their shareholder’s loan account is a tax equation that they can discuss with their accountant says Edmonton bookkeeping. By learning how to keep track of all the money that they have taken out of their business in their shareholder’s loan accounts, can help them figure out how to declare salary or dividends.