There are many things that business owners should understand about shareholder loans when they are new in their incorporation according to Edmonton bookkeeping. The reason is, is business owners can significantly impact their taxes if they understand what shareholder loans are, and why they would have to keep very good track of all of their personal expenditures with business money. When entrepreneurs learn how to track any personal expenditures very well, they can avoid having business expenses being attributed as personal expenses, and therefore paying additional personal taxes on things that should only have a business tax applied. Since the highest personal tax rate in Alberta is currently 48%, and the small business tax is 11%. Entrepreneurs could potentially pay up to 37% more in taxes if they do not keep good track of their expenditures.
Ultimately, the best course of action is for entrepreneurs to never make personal transactions in their corporate account. It should have a corporate bank account and a corporate credit card and never make personal payments from their corporate business account, as well as never make corporate payments from their personal bank account or credit card. However, industry Canada says that 80% of all entrepreneurs do this at some point in their business, which would make it very important for entrepreneurs to understand how to keep track of it, rather than telling them that they never should know that they will.
The first thing that entrepreneurs should know says Edmonton bookkeeping is what a shareholder loan is. This is an area set up in the balance sheet under liabilities that is designed to keep track of all of the money that an entrepreneur spends in their business that is for personal use. This might include things like using the corporate credit card to pay for groceries, using the corporate debit card to take cash out of a bank machine for personal use, or it could even be using business money to pay for meals in a restaurant that were not business meals. Also, business owners can put into their shareholder loan account any expenditures from their personal bank account that was for business purposes an example of this would be if an entrepreneur needed to use their personal credit card in order to pay an invoice of their business. Or if they take money out of their RRSPs or tax-free savings account to pay for their payroll.
At the end of their fiscal year, Edmonton bookkeeping and their accountant will review the number of transactions that were taken out of the business personally as well as put into the business personally. The money that was put into the business personally is subtracted from the amount of money that was taken out of the business for personal use, and the remaining amount left over is the amount of money that an entrepreneur needs to pay personal taxes on or they need to pay it back to their corporation.
Edmonton Bookkeeping | What To Know About Shareholder Loans
Business owners should understand that all of the money that they take out of their business personally they need to pay taxes on says Edmonton bookkeeping. If they do not, that is considered tax evasion, because they’re profiting from their business and taking money out without paying the appropriate taxes. How entrepreneurs should take money out of their business, is through salary or dividends. However, 80% of all entrepreneurs will take money out of their corporation for personal use as well as put money into the corporation from their personal bank account. Since how common this is, entrepreneurs need to understand what they should do once they have taken money out personally.
Once an entrepreneur has done their fiscal year-end with their Edmonton bookkeeping and accounting company, entrepreneurs will have the amount of how much money they have taken out of their business. They either need to claim that money as salary or dividends. They may pay that money back into the corporation however since most entrepreneurs will take money out of their corporation because they need to use it to live, so paying it back is not practical. Therefore they need to make the decision along with their accountant if they should take it through salary or dividends. The difference between salary and dividends is how it appears on the balance sheets of the business.
If an entrepreneur decides to take the money that they have taken out of their bank account as a dividend, business owners need to understand that a dividend is money that the company has profited. If they have not turned a profit in the last year, an entrepreneur cannot claim that money. Or, if an entrepreneur has taken ten thousand dollars out of their business, but they do not have ten thousand dollars in profit, they are not going to be able to take the entire thing out as a dividend. However, dividends show on the balance sheet instead of the income statement, because it is not considered an expense of the corporation.
Salary, on the other hand, is technically considered an expense of the business, and therefore it actually decreases the prophets and bottom line of the business if an entrepreneur is planning on selling the business within the next few years, Edmonton bookkeeping recommends entrepreneurs minimizing the amount of money that they take in salary, in order to make the income statement look as positive as possible. Something else for entrepreneurs to keep in mind if they pay themselves a salary is an entrepreneur is required to pay source deductions on that amount. This includes employer and employee contributions to CPP, EI as well as income tax. If an entrepreneur has already taken all of that money out of their business, and claim at all as salary, they are going to have to pay all of the income tax amounts on it.
Ultimately, and efficient tax strategy should be thought up ahead of time with Edmonton bookkeeping and accountant, however at the end of the year, and accountant will be able to strategize and figure the best split that an entrepreneur needs to claim in their business to pay minimal taxes on the amount.