So you've started a business and you're finally in a position to pay yourself for all that hard work. You may even be using the business account to pay your bills. Yippee! Chances are however, you're getting conflicting information on how all this works and how to account for it in the books. There might be some common questions you're asking yourself.
Do I keep my personal spending separate?
Am I an employee?
What do I do about super?
How do I allocate my personal transactions?
What if some transactions are part business, part personal?
I've changed from sole trader to company, what's the difference?
If I borrow money from the business, do I have to pay it back?
You may be surprised to hear that there is no single answer to these questions. The main reason being it depends on your business structure (the type of business structure it is registered as). For example the bookkeeping for personal and wage transactions are completely different between sole traders and companies.
From our experience as a public practice bookkeeping business, this is one of the biggest mistakes the individual manager of a new business makes. Getting your books and financial procedures wrong from the get-go can cost hundreds or even thousands of dollars down the track. It's completely fine to do the books yourself (and we completely recommend it at least initially so you understand the reports and processes) but our biggest tip is to engage a professional BAS or tax agent to point you in the right direction from the start. Just a one or two hour consult maybe all that's required.
Sole Trader Structure
Firstly, the term Sole Trader is a legal term relating to your business structure. It isn't a descriptive term based on how your business operates. For example, a company can be run by just one person, and contrary, a sole trader business may have employees. This is super important when setting up your business books and chart of accounts.
Getting a little off-track here too but worth noting - are you considering a company structure for the lower income tax rates? Be sure to check out the ATO's info on personal services income (PSI) here.
Ok, so back on point. If your business is a sole trader business and you want to take money from the business for personal use, including drawing a regular type 'wage', this is pretty straight forward. You simply allocate this to the owner's drawing account which is an equity account in your chart of accounts (COA). It isn't run through payroll which means it isn't subject to PAYG at this point, or super. Please consider regular personal super contributions though for your future financial wellbeing - you may be interested in our blog Are you a SUPER organised Sole Trader?
You're probably a little confused at this point, that's okay, let us explain a little further. Your sole trader bookkeeping records will provide a profit and loss report, this won't include your personal drawings so it will give an accurate amount of profit for your business activities. Essentially your profit is your income so it is this profit that is taken into account by your tax agent to look at your end of year financials. Remember, you as a sole trader ARE the business (one and the same entity) so the business profits are your income, regardless if you draw on it or not. After you've been in business a while and have lodged a tax return, you may be entered into a PAYGI system where you pay regular income tax installments throughout the year.
Keep in mind, as stated earlier, if you do pay employees, then their wages and super etc are a true expense to the business and will come under your business expense accounts, therefore reducing your profits. Make sure any employee wages are through a compliant payroll system and you are registered for PAYGW (pay as you go withholding).
Being the Director of a company is quite different in regards to drawings or payroll. Unlike a sole trader, you and the company are not the same legal entity. This means the company is completely separate (the ABN/ACN is in the company name, not yours) and needs to be accounted for that way.
Basically if you take funds from the company, you are either borrowing funds from the company (to be repaid) or you are being paid by the company. More info on company loans here.
Being paid by the company can be under several forms but the most common are as an employee (general wages through payroll) or Director's fees. Director's fees can be dealt with a little differently for tax purposes - it is best to discuss the implications with your tax agent for your unique circumstances and work out the best option for you. There are also legal considerations such as the company constitution, contractual agreements, work cover and super.
From a reporting and compliance point of view, make sure any payroll is done properly including PAYGW registration, super clearing house payments, single touch payroll (STP) and workers compensation cover for all employees (check your state/territory rules for Director's work cover). If you take Director's drawings that will be dealt with later by your tax agent (maybe as a loan or Director fees), ensure you have a Director's Loan liability account set up and allocate any of those personal transactions to that one (including funds contributed to the business too). That way, at a glance of your balance sheet, you will be able to see any funds taken from the business that will need to be dealt with at end of year.
Modern cloud-based bookkeeping software can be an amazing tool if used correctly. Not only will they generate accurate reports to help with business decisions, BAS, payroll and end of year financials, they also link directly to your bank and receipt programs for time-saving automated bookkeeping.
Just make sure the default drawings accounts are accurate for your business structure and ask your bookkeeper to check everything is in order. You may need to add or edit some accounts to suit your circumstances. If some of your transactions are a little messy, such as making a purchase that may cover both business and personal costs, the software will be able to split those too to the correct accounts.
Finally a quick note on Super. All employees, including Director's wages are subject to super guarantee laws. If you're paying employees, even if it's just you, make sure your bookkeeping software can cover your needs. See more information about your super obligations here.
If you need help with your bookkeeping (including choosing software), BAS services or end of year financials, we can help. Contact us today.