The first and most important thing to understand is that the business account is only for the business – it is not your personal bank account. Unless you are a sole trader, the money in the account is not your money.
Your Loan Account with the Business
Unless you are paying yourself a wage from the business - whenever you take money out (or put money in) this is allocated to a ‘loan’ account. When you take out more money then you have put in or declared as a wage – suddenly you now owe the company money! Uh oh…… so how do we rectify this?
Depositing Money into your Business
When the time arises that you need to deposit money from a personal account into the business bank account as working capital here’s what you should do:
- You should clearly mark the deposit “Loan from… (you)” in the xero file.
- Create a liability account called “Loans from… (you)” and code those deposits to it. This account may have already been created if we set the file up for you.
The business now owes you that money and can repay it at any time. The repayment to you by the business is not income to you.
Taking money out – because we all need to live right?!
Now that the business has had its initial cash injection (likely you depositing some of your own personal funds) – and you’re up and running, how do you withdraw money either as a once off or as recurring weekly payments?
When setting up the business it’s important to have a conversation with one of the awesome accountants at Illumin8 about the best way to pay yourself from your business. Whether that be a wage (processed through payroll) or withdrawing money throughout the year and declaring a once off dividend payment at the end of the year. This decision depends on your circumstances.
Paying a Wage
If you have set yourself up as an employee of the business and will be making regular withdrawals as a wage then this is what you should do –
- Pay yourself the recurring wage by setting in place an automatic transfer of money from the business account to your personal account.
- When this transaction appears in your Xero file it should be coded like all other wages – to the ‘Wages Payable’ account.
No Wage - Taking Funds as you See Fit
If wages aren’t the option for you then alternatively you can simply withdraw funds from the business bank account to your personal bank account – whether that be by an automatic transfer or by simply taking funds out when and if required.
When this transaction appears in your Xero file it should be coded to your ‘loan’ account - the same loan account used when depositing money into the business.
Wait… so if I’m not declaring a wage does this mean I’m living the tax-free lifestyle of Wesley Snipes? Definitely not!! When you withdraw more money then you have put in you now owe the company money. To offset this we can declare a dividend. This dividend will flow through to your individual tax return/s and you will be taxed at your individual marginal tax rate.
How much do we need to declare as a dividend? Well that’s where we come in and use our super sweet accounting skills to work out the most tax-effective strategy for you! This is all done when it comes time to do your tax returns.
Personal Expenses - A Warning
Paying personal expenses from the business bank account is not a good idea. They add to the number and complexity of the transactions you are paying us to deal with. Depending upon the legal structure through which you are trading, personal expense payments can create problems of Fringe Benefits Tax and deemed dividends.