The number one way clients who have incorporated companies (Ltd., Limited, Inc., Incorporated) get themselves into trouble is thinking that the company is “theirs”.
When you incorporate a company you are actually creating something that is it’s own entity. When you hold the shares of that company you do have the authorization to make the decisions but the assets (including the cash value items like the bank account) do not belong to the shareholders – they belong to the company.
Any company that has been incorporated with have a liability account on the Balance Sheet called a Shareholders Loans account or Due to Shareholder or some other such name variation. This account is used to account for funds that the shareholder (s) have loaned the company. This account is also used to keep track of money the company has “loaned” the shareholder. At the end of the fiscal year (the company year end) this account can NOT be in a negative balance – meaning that the shareholder (s) can NOT owe the company money. The two main ways that shareholders can take funds from the company are either through payroll or via dividends.
So where do people go wrong? They think to themselves – this is my company. I started it and if there’s money in the bank account its mine to do with as I please. WRONG. The money belongs to the company. If you use the company debit card to buy your groceries at the store, then you should be depositing that money back into the company and making a note for your bookkeeper that the withdrawal was personal and the deposit is reimbursement for it. If you happen to have put a large amount of money into the company to get it going, keep it a float, etc. then you can pay yourself back some of that money in this way. But be very careful. You should be getting financial statements on a regular basis and you should be watching that Shareholder’s Loans account religiously to make sure you don’t get yourself into a situation where you’re owing the company money.
The easiest way I try to help it make sense for people is to consider the company a guy named Bob. That’s Bob’s debit card, Bob’s credit card and Bob’s cheque book. If you use Bob’s debit card to pay for your massage, groceries or what have you, you’d better pay Bob back or he’ll an ex-friend who might be calling the police to report a theft.
So if you have started or taken over an incorporated company, be a good friend to “Bob”. Don’t use his credit card, debit card or cheque book to pay your own personal expenses. And, if you happen to do so – make sure to pay Bob back in a timely fashion and make clear notes for your bookkeeper.