Understanding Shareholder Current Accounts: A Complete Guide for Business Owners

Running a company involves numerous financial complexities, and one area that often catches business owners off-guard is the management of shareholder current accounts. Whether you’re a seasoned entrepreneur or just starting your business journey, understanding how these accounts work can save you from costly mistakes down the road.

Think of a shareholder current account as a running tally between you and your company – it tracks every dollar you put in and every dollar you take out. While this might sound straightforward, the implications can be far-reaching, especially if your business faces financial difficulties.

What Exactly Is a Shareholder Current Account?

A shareholder current account serves as a financial ledger that records all monetary transactions between shareholders and their company. This account is completely separate from share capital and operates as a dynamic record that changes with each transaction.

When you first establish your company, you typically inject working capital to get operations started. This initial contribution becomes the opening balance of your shareholder current account. From that point forward, every personal expense paid by the company, every loan you make to the business, and every drawing you take gets recorded in this account.

The Two Sides of the Coin

Your shareholder current account can exist in two states:

Credit Balance (Company owes you): This occurs when you’ve contributed more money to the company than you’ve withdrawn. In this scenario, the company is in your debt, and this amount appears as a liability on the company’s balance sheet.

Debit Balance (You owe the company): This happens when you’ve taken more money out of the company than you’ve put in. The company now has a claim against you, and this appears as an asset on the balance sheet.

The Reality of Overdrawn Shareholder Current Accounts

Here’s where many business owners find themselves in hot water. An overdrawn current account means you’ve withdrawn more from the company than you’ve contributed. While this might seem like a simple bookkeeping entry, it carries significant legal and financial implications.

Consider Sarah, a small business owner who regularly uses company funds to pay for personal expenses like groceries, mortgage payments, and family holidays. Over three years, she’s drawn $150,000 more than she’s contributed to the business. If her company faces liquidation, she’ll be legally obligated to repay this entire amount to the company’s creditors.

Why Overdrawn Shareholder Current Accounts Become Problematic

When a company enters liquidation, liquidators have a legal duty to recover all company assets – including money owed by shareholders. An overdrawn current account represents a debt that must be collected and distributed to creditors.

The harsh reality is that many business owners don’t realize the personal liability they’re creating until it’s too late. Unlike a formal loan with agreed terms and conditions, an overdrawn current account can be called up immediately by a liquidator.

Smart Strategies for Managing Your Shareholder Current Account

Protecting yourself requires proactive management and proper documentation. Here are proven strategies that successful business owners use:

Formalize Your Financial Arrangements

If you’re lending money to your company, treat it like a real loan. Create proper loan documentation, set interest rates, and establish repayment terms. More importantly, register your security interest on the Personal Property Securities Register (PPSR) to protect your position if the company fails.

Regular Salary Declarations

Many accountants recommend declaring an annual salary to reduce current account debit balances. This serves two purposes: it legitimizes money you’ve withdrawn from the company, and it reduces your potential liability if the company faces difficulties.

The key is ensuring your declared salary is reasonable for the work you perform. Courts and liquidators scrutinize excessive salary declarations, especially if they coincide with financial difficulties.

Monitor Your Shareholder Current Account Regularly

Don’t wait until year-end to review your current account position. Monthly monitoring allows you to make adjustments before problems become unmanageable. If your account is becoming significantly overdrawn, consider:

• Injecting additional capital into the business
• Reducing personal drawings
• Declaring a dividend (if the company has distributable profits)
• Taking a formal salary and paying appropriate taxes

What Liquidators Look For

Understanding a liquidator’s perspective can help you avoid common pitfalls. When examining shareholder current accounts, liquidators typically focus on:

Timing of Transactions: Large withdrawals or account clearances immediately before liquidation raise red flags. These transactions may be deemed unfair preferences or insolvent transactions.

Combined Account Analysis: If multiple shareholders exist, liquidators examine each individual’s position. You can’t hide behind other shareholders’ credit balances if your personal account is overdrawn.

Documentation Standards: Transactions lacking proper authorization, board minutes, or solvency certificates become targets for recovery actions.

Excessive Remuneration: Salary declarations without supporting documentation or those deemed unreasonable for services provided face scrutiny.

The Consequences of Poor Management

The stakes are higher than many business owners realize. When liquidators pursue overdrawn current accounts, shareholders face several potential outcomes:

• Immediate repayment demands for the full overdrawn amount
• Legal proceedings if voluntary repayment isn’t forthcoming
• Settlement negotiations that may still require substantial payments
• Personal financial stress that can affect family and other business interests

Consider the case of a manufacturing company director who had an overdrawn current account of $300,000 when his company failed. Despite arguing that he’d worked without salary for years, the lack of proper documentation meant he had to sell his family home to settle the liquidator’s claim.

Practical Steps for Better Shareholder Current Account Management

Implementing these practices can significantly reduce your risk:

Create a Monthly Review Process

Set aside time each month to review your current account position with your accountant. This regular check-in allows you to spot trends and make corrections before they become problematic.

Establish Clear Drawing Policies

Rather than taking money ad-hoc, establish a formal drawing policy. This might include monthly allowances, expense reimbursement procedures, and approval processes for larger amounts.

Learn more here: Drawings and shareholder current accounts

Maintain Detailed Records

Document the business purpose of every transaction. Personal expenses should be clearly identified and tracked separately from legitimate business expenses.

Plan for Tax Implications

Remember that money withdrawn from companies often has tax consequences. Work with your accountant to ensure you’re meeting all PAYE and income tax obligations.

Learn more: 

Understanding PAYE: A Guide for New Zealand Employers

Terminal Tax NZ: Key Deadlines and Strategies Explained

Your Guide to Understanding What is Provisional Tax in NZ

Moving Forward: Building Better Financial Habits

Managing shareholder current accounts effectively requires discipline, proper documentation, and regular professional advice. The key is treating your company as a separate legal entity, even though you own it.

Many successful business owners establish monthly “board meetings” (even if they’re the only director) to formally review and approve transactions. This creates the documentation trail that can protect you if problems arise later.

Remember, prevention is always better than cure. The time and money spent on proper account management pales in comparison to the potential costs of dealing with an overdrawn current account during liquidation.

Getting Professional Help

If you’re concerned about your current account position or need help establishing better management practices, seek professional advice early. Accountants and business advisors can help you implement systems that protect both your business and personal interests.

Don’t wait until financial difficulties arise to address current account issues. By then, your options become limited, and the costs of resolution increase significantly.

The management of shareholder current accounts might seem like a mundane accounting matter, but it’s actually one of the most important aspects of business ownership. Get it right, and you’ll sleep better knowing you’re protected. Get it wrong, and you might face personal liability that extends far beyond your original business investment.

Understanding these principles and implementing proper management practices will serve you well throughout your business journey, providing both legal protection and peace of mind.