The reason why so important for entrepreneurs to be keeping track of all of the money that they take out of their business as well as put into it says Edmonton bookkeeping, is because if they take out more money than they put in at the end of the year, they either have to pay that money back to their corporation or pay taxes on it to Canada revenue agency. Since 80% of all entrepreneurs either take money out of their business or put money in, this is important information for all entrepreneurs to know.
The first thing that entrepreneurs need to understand, is what the shareholder’s loan is. This is an account that is set up in the financial statements of the business. On the balance sheet, underneath the liability section, you will have an account that is designed to keep track of all of the money that an entrepreneur has taken out of their business personally, and put into their business as well says Edmonton bookkeeping.
This is information that only an entrepreneur that owns an unincorporated business needs to know, if they own a proprietorship, the business does not have shareholders, as well it is not considered a separate legal entity. Since unincorporated business is considered legally separate from the business owner for tax reasons, it is important that all of the money that is personally used or removed from the business is accounted for.
The different types of transactions that should be considered shareholder transactions says Edmonton bookkeeping is anything where an entrepreneur is taking money and using it for personal uses. This includes using a business bank card to take money out of the business for personal use, using the business bank card to buy meals for personal consumption, or even using the company credit card to buy gifts, or groceries or I will consider shareholder transactions. Also, if an entrepreneur uses their personal money to pay business expenses like using a personal credit card to pay a business bill, or writing a personal check in order to cover payroll, these are all transactions that count towards the shareholder loan.
At the end of the year, entrepreneurs must subtract the amount of money that they have taken out of the business from the money that they will put in, and if they have taken more money out of the business, they either need to pay that back or pay taxes on it by declaring it as salary or dividends. While some entrepreneurs wonder if it is possible for them to continue owning their business for a short period of time, this is possible but not advisable. The longer an entrepreneur is over money by their corporation, the more it is considered a long-term liability, and the greater chance that Canada revenue agency is going to request that an entrepreneur pays the corporation interest on the amount that they have borrowed from their business and is not paid back.
Edmonton Bookkeeping | Why Keeping Track Of Shareholder Loans Is Important
A typical scenario of businesses, especially when they are starting out says Edmonton bookkeeping is when they take money from their corporation in order to help pay for household expenses. They end up paying significantly more taxes because they have taken money out of their business, however, there is not enough money in their business to pay all of their business expenses. Entrepreneurs should be very mindful of all of the money that they take out of their business, and at the end of the year, they need to make a decision with their accountant on how they should claim that money that they have taken out of their business to the government.
The two choices that entrepreneurs have when they are claiming that they have taken money from their business to Canada revenue agency, is through salary or dividends. This is a complex issue says Edmonton bookkeeping, and with the most part, accountants need to make that decision for entrepreneurs, in order to determine the best possible split of salary and dividends. Accountants will ask questions such as how many shares does the entrepreneur owns in their corporation, or are they the sole owner? If they have owners, what percentage did the over? Are they depending on the corporation to support their family, and to do they have of their income from outside sources? These are all important questions that must be answered in order to make the right determination of how an entrepreneur claims the taken money from their business.
When way that entrepreneurs can help make this determining factor is understanding the difference between a salary and dividends says Edmonton bookkeeping. A dividend is the amount of money that the company has profited and therefore can disburse as earnings of the corporation. Because this is not an expense of the business, it does not show up on the income statement, instead, it shows up on the balance sheet. Dividends have a different set of tax rules they must abide by.
On the other hand, salary is the most common way for entrepreneurs to get rid of the shareholder loan amount that is owed. However, when entrepreneurs take a salary, that minimizes the profit in the business because it is considered an expense of a corporation. It negatively affects the bottom line. while this is not necessarily a big issue, if the entrepreneur is thinking of selling the business in the next few years, they might want to think about taking a salary, so that it does not negatively affect how the profit looks to an investor.
Another thing that entrepreneurs should consider about salary says Edmonton bookkeeping, is that when they declare that they have taken a salary from their business to Canada revenue agency, entrepreneurs also need to pay source deductions on that. Income tax, EI and the employer plus employee portion of their CPP must be paid. If an entrepreneur can afford that, that is going to factor into whether or not they can claim salary.