You tell me my company made a profit of $100,000 and I need to pay tax of $23,920. You also tell me ‘you’ve declared a shareholder salary of $100,000 to me – where is my salary and where is that profit? There’s nothing in the bank and I’m confused.
Then the accountant warbles on about shareholder current accounts (SCAs) and the new business owner can be left frustrated (putting it mildly).
So here goes with our best Beany explanation:
It can feel like you are your company sometimes. But the reality is that the company has its own legal status. In its simplest form, the SCA shows the movement of money between the two entities – you and your company. This can be particularly significant where the company is owned by more than one person.
The shareholder current account is used to keep track of the money you contribute to the business and all the money you withdraw from the business.
The company obtains money through a bank loan – the bank transfers the loan amount to the company’s operating bank account. The company owes money to the bank and shows it as a Bank Loan, which is a liability in the balance sheet.
If the bank won’t provide a loan and/or the interest rate is too high, you can deposit personal money into the company’s bank account yourself. From the company’s perspective, it owes you that money (and you won’t charge interest). When the company owes you money, it’s also a liability, but we call it a Shareholder Current Account.
Can I take out more than I put in?
You certainly can, but it’s definitely not advisable. You would have an overdrawn SCA where you owe money to the company. In other words, the company has given you a loan. When that happens, the IRD requires that the company charge you interest – they have a set rate each year. We perform the calculation for you.
For the company directors out there – if the company becomes insolvent as a result, there could be serious consequences.
For shareholders – there is a risk of losing the limited liability protection of a company. If problems arise, you may be liable up to the amount of the overdrawn current account.
An overdrawn current account is almost always a warning sign of pressure so if you hear this, take it seriously and make time to understand what’s going on.
Am I paying interest to Inland Revenue on the overdrawn current account?
No – only to the company. You’ll usually only pay interest to Inland Revenue when you don’t make your required payments on time.
Do I actually need to pay interest to the company?
Not cash – no. Your accountant makes an adjustment at the end of the year.