A common transaction in a company is lending and borrowing of funds from the company’s shareholder or director. The objective is mainly the development of the company through less restrictive and cheaper cash contributions.
As your cash is unstable, especially at the beginning of the company, the shareholders and/or directors have different possibilities to ensure financing of the company or withdraw funds from the company.
These financings can be productive of interests.
What are the conditions?
Only shareholders or directors can have a Receivable/Payable account in the company.
To avoid any problem in the future, it is preferable to write an agreement between the company and the shareholders or directors to specify the terms, especially for the loan from the company (interest rate or not, refund…).
Gorioux Siam can help you to choose the best financing, or draft your contracts.
How does it work?
The operation of a shareholder / Director account is very simple because it does not require any particular formalism, unlike changes in social capital.
The shareholder / director account can be:
- Payable (credit), that means the company owes debt to him.
Business expenses paid by the owner are the most common types of transactions between a business and a shareholder / director, especially for small businesses. The owner may be out doing personal errands and picking up a few things for the business or may want to use a personal credit card to buy business supplies to get credit card miles. The company owes the owner for any business expenses paid personally. The original transaction and the repayment should be clearly accounted for so that it does not appear as if the company is paying the owner a salary.
The second way is when the owner makes a loan to the business to cover temporary cash shortages, the transaction is booked in a shareholder account. In this case, the owner takes funds from a personal account and deposits them into a company business account.
- Receivable (Debit), that means he owes debt to the company;
Depending on the nature of the company and/or shareholder, the shareholders or directors may have the right and ability to borrow funds from the company. For example, with small companies that may have a few shareholders that are business partners or family members who contributed start-up capital.
An owner of a private company may remove cash from the business for personal use and may either take it as a distribution or a loan:
- A distribution is not paid back and is considered income of the shareholder.
- A loan allows the shareholder to use the funds and pay them back.
For a company with more than one shareholder, the borrower may need to obtain permission from the other shareholders before taking a loan.
Shareholder’s account: a means of financing and providing funds
Advances on shareholder accounts are an alternative to cash contributions in the capital of the company.
In practice you have 3 types of funding:
- A cash contribution to the capital of the new company or in the development phase;
- A bank loan;
- A contribution by shareholders or directors.
The advantage of this type of arrangement is that the contribution to the shareholder / director account, unlike the sums paid in capital, can be refunded immediately or at the end of a blocking time.
The second advantage is that instead of making a distribution of dividends to share the profit of the company, you can choose first to refund the shareholder’s accounts because there is no tax on the refund (but you have to pay 10% of tax on dividends).
The third advantage is that you do not have any strict schedule for the refund unlike with the bank loan.
The last advantage is that it might produce interests.
Shareholder’s account contributions do not offer the same guarantees as capital contributions for third parties of the company, because of the possibility of being able to be refunded when the company has sufficient funds.
When the company has profit each year and distributes dividends to shareholders, those who have mainly contributed their funds to the shareholder account will only receive funds according to the percentage of capital.
Do not hesitate to contact Gorioux Siam to find the best way for your specific case in respect of the legality and to prevent any litigation in the future.
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