Using Corporate Account for Personal Purchases
(Vancouver, BC, Canada)
All corporate assets (including the bank account) and corporate credit lines (including credit cards) belong to the corporation not the owner/manager.
HELP! NEWBIE here!
Although I know this is not good practice at all, the president/shareholder/owner has made a few purchases using the corporation's account.
Now I don't know if this should be recorded as a Shareholder Loan or as part of his management fee or just tell him he has to reimburse the company; it's making the bank reconciliation all messed up.
This corporation is fairly new and was just switched from a Sole Proprietorship not long ago.
When the company was just starting as a sole proprietorship, the owner (now shareholder/director/manager/president) was regularly putting his own money towards getting the company started so I guess in some ways he is paying himself back now that the company is finally making money.
I'm so confused.
There is no question that the best practice is NOT to use corporate funds for personal purchases. Hey but stuff happens. When it does, run the charge(s) through the Owed to Owner
It is important for the owner to understand the difference between a sole proprietor and a corporation.
The owner needs to understand the money was theirs when they were a sole proprietorship
. The biggest challenge for a sole proprietor
is to keep business and personal expenses separate
Once incorporated, the owner needs to understand that corporate funds are no longer their money
. All assets (including the bank account) and credit lines (including credit cards) now belong to the corporation.
In an incorporated company, owners must be very careful that money removed from the company is not at risk to be taxable.
You also talked about management fees
. As far as I know, owners cannot pay themselves management fees. I believe this type of fee occurs between two related and/or associated
The owner is now an employee of the corporation and should be put on the payroll to receive a pay cheque for their work performed in the company. The pay cheque should have CRA source deductions taken.
As alluded to above, if the corporate owner just relies on draws throughout the year, s/he may have tax problems at year-end if the draws exceeded personal funds contributed to the corporation ... i.e. the shareholder loan account runs into a debit position.
It's important for the owner to speak with an accountant before
they withdraw funds from the corporation to avoid negative tax consequences ... and charging personal expenses to the corporation is removing funds.
Some things can't be fixed after the event ... and these types of lessons can be expensive lessons for owner/managers of corporations.
So the long and short of it from your perspective is ... book all personal expenses to the Owed to Owner account. The account should be setup as a current liability account. When the owner reimburses the company, it will be booked to the Owed to Owner account to offset the personal expenses.
This should keep the bank reconciliation clean. You might even consider providing the owner with a weekly / monthly / regular report that details how much money s/he needs to pay back to the company.
Best case scenario is the owner pays themselves enough as an employee to cover their personal lifestyle ... so that there is no need to use corporate funds for personal expenses.
As a side note, I like to keep the Shareholder Loan account free to record actual contributions and "conscious" withdrawals by the shareholder ... which is why I use the Owed to Owner account to track the personal expense type of transactions.
Hope this helps.