What is a Shareholder’s Current Account?
A shareholder's current account functions similarly to a personal bank account for each shareholder. This account sits on the company's balance sheet and tracks all money that comes in and out between the company and its shareholders. Essentially, if a shareholder loans the company money or pays company expenses from personal funds, this is recorded as a credit to the shareholder's current account. Conversely, if a shareholder withdraws money from the company, this is recorded as a debit.
It’s vital to understand this balance, especially when it comes to tax implications or financial risks. For instance, if the company owes you money, but it lacks sufficient funds, and you personally face financial difficulties, calling on your loan to the company could put your business at risk.
Contributions and Working Capital
At the beginning of a business, shareholders often contribute money as working capital to help get the company off the ground. This initial investment is recorded in the shareholder’s current account as a credit, meaning the company owes the shareholder this amount.
During the course of business, if a company’s cash flow is tight, shareholders may also pay company expenses from their personal accounts. These payments are treated as advances to the company and credited to the shareholder’s current account. To make the process transparent, it's ideal to transfer money from your personal account to the company’s account before paying company bills. This ensures proper tracking of all business expenses.
Drawing Money from the Business
When shareholders take money out of the company, these are called drawings. Each withdrawal is debited from the shareholder’s current account, lowering the balance. Regular drawings work in the same manner and are reflected as debits on the balance sheet.
If you consistently withdraw more than what you have contributed, your shareholder's current account will become overdrawn. At this point, the balance shows that you owe the company money. It's important to keep track of these withdrawals because exceeding your balance can lead to tax complications.
Overdrawn Shareholder Accounts and Tax Consequences
If a shareholder’s current account becomes overdrawn, meaning the shareholder has taken more out of the company than they’ve put in, this is treated as a loan from the company to the shareholder. The Inland Revenue Department (IRD) views this as a loan and requires that interest be charged on it. If interest isn’t charged, it is considered a benefit provided by the company, which would be subject to Fringe Benefit Tax (FBT).
Having an overdrawn account at the end of the financial year can lead to additional complications, but there are a few ways to resolve the issue:
- Repayment: Transfer money back into the company to repay the overdrawn amount.
- Declare a Shareholder Salary: This option requires the company to be profitable. The declared salary will be treated as income on the shareholder’s tax return and can offset the overdrawn balance.
- Declare a Dividend: If the company has retained earnings and is solvent, it can declare a dividend that’s credited to the shareholder’s current account instead of paying it out in cash. This helps resolve the overdrawn balance while maintaining compliance with tax regulations.
Why Managing Your Shareholder’s Current Account Matters
A shareholder’s current account is more than just a record of transactions; it has significant implications for both personal and business financial stability. By maintaining a clear understanding of this account and keeping it balanced, shareholders can avoid potential risks such as having insufficient funds to cover loans, falling into tax complications, or jeopardising the company’s financial health.
If you have further questions about managing your shareholder’s current account or need advice on resolving overdrawn balances, contact your trusted advisor at Bellingham Wallace.
Author – Graeme Wilson
