While most Edmonton bookkeeping companies recommend entrepreneurs should avoid taking money out of their business personally, it becomes unavoidable from time to time, with 80% of all entrepreneurs using their personal finances to finance their business. Since how common this is, business owners need to understand how to keep track of all of the money that they have taken out of their business personally as well as put into their business, so they can minimize the taxes that they have to pay on the amount that they have taken out of their business.
An entrepreneur needs to understand what a shareholder’s loan account is. If they own a corporation, it is going to be set up in the liability section of their balance sheet. This is designed to keep track of all of the money that an entrepreneur has taken out of the business, as well as put in. At the end of the year, an entrepreneur along with their Edmonton bookkeeping company will figure out if they have taken out more money than they were put into the business. If they have taken out more, they need to figure out how they are going to claim that money to Canada’s revenue agency.
While entrepreneurs can avoid paying that money back to the corporation and declaring it as salary or dividends, it is not advisable. The longer an entrepreneur owes money back to their corporation, it is considered a long-term liability. Since the business owner and the corporation are considered separate legal entities for tax purposes, Canada revenue agency may be wondering why an entrepreneur has either not pay that money back, or is not paying interest on that amount. They may assess the business owner with additional interest and penalties, and even clawback that amount for the length of the time that the entrepreneur has owed that money to their corporation and expected to be paid back.
Rather than having an overdrawn shareholder loan account, entrepreneurs should instead decide how they are going to claim they have taken that money out of their business. They can either say that they have paid themselves a salary, or dividends. This is the most tax efficient strategy is going to be up to the entrepreneur and their accountant. There is many things that an entrepreneur and their accountant must take into consideration as to how to declare the money. Depending on all of those various factors, it is generally a mixture of both. Edmonton bookkeeping says that it is rarely a hundred percent salary or a hundred percent dividends.
By ensuring they keep all personal transactions to a minimum within their corporation, as well as keeping very good track of all of the transactions that they make in their business that is personal, can help entrepreneurs ensure that at the end of the year, they are paying the minimum amount of taxes possible on the amount that they have taken out of their business for personal use.
Edmonton Bookkeeping | Why Entrepreneurs Should Understand Shareholders Loan Accounts
An extremely common scenario from many entrepreneurs is that they take money out of their business to pay household expenses says Edmonton bookkeeping. However, when an entrepreneur takes money out of their business personally uses, they end up paying more tax on that. How to come up with an efficient tax strategy requires entrepreneurs keeping track of all of the money that they have taken out of their business in a shareholders loan account. At the end of the year, if they have taken out more money from their business then they have put into it, they need to discuss with their accountant what the most efficient tax strategy would be for that money.
There is two different ways that an entrepreneur can claim they have taken that money out of their business to Canada revenue agency. They can either declare that they have taken the money out through salary or through dividends. Edmonton bookkeeping says that dividends are able to be distributed when the company turns a profit. And it is the disbursement of the prophets of the business. It shows up on the balance sheet of the business and not the income statement. The reason for this is because it is not considered an expense of the business, but disbursements of the prophets.
Salary, on the other hand, says Edmonton bookkeeping is considered an expense of the business, and so it affects the business’s bottom line. In addition to that, when entrepreneurs declare that they have taken money out of their business as a salary, they also need to pay all the applicable payroll taxes to accompany that amount. This includes income tax, EI as well as the employer and employee portion of CPP. However, Edmonton bookkeeping says that salary is the most common way for an entrepreneur to get rid of the shareholder loan account surplus.
When entrepreneurs are making the decision on how to claim they have taken money out, it is a decision that needs to be discussed with their accountant, because there is several factors that will help an accountant decide how to take the money out. It is usually a mix of salary and dividends. Accountants will use factors such as does the entrepreneur depend on the money to support their family, are the sole owner of their corporation, or do they have business partners. Once they figure out the best split, an entrepreneur can claim that amount to Canada revenue agency, and it effectively clears their shareholder loan account, And they can start counting the money that they put into their business and take out all over again.
Entrepreneurs should consider avoiding all personal transactions in their corporation because a better approach to business is to use their corporation to save money and make it grow and is an effective way of keeping their business thriving. By understanding the shareholder loan account in their business, business owners can work with their accountant to come up with an efficient tax payment strategy.