A frequent conversation with any client goes something like this:
“You tell me I’ve 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 current accounts 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. The current account 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.
Think of it like the company having a flexible loan account or an overdraft – not with the bank or with a separate bank account, but with you. You are the bank account. The Shareholder Current Account is used to keep track of the money you deposit into the business and all the money you withdraw from the business.
The company could obtain money through a bank loan – the bank would transfer the loan amount to the company’s bank account. The company would owe money to the bank. If the bank won’t provide a loan or overdraft and/or the interest rate is too high, you can deposit personal money into the company’s bank account. From the company’s perspective, it owes you that money (and you won’t charge interest).
If the company had borrowed from the bank, the company would show the money due as an overdraft or a loan – a liability in the balance sheet. 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.
Do I actually need to pay interest to the company?
Not cash – no. We make an adjustment at the end of the year.
Am I paying interest to the IRD on the overdrawn current account?
No – only to the company. You’ll usually only pay interest to the IRD when you don’t make your required payments on time.
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