A shareholder's current account: alternative financing for your company
A shareholder's current account is one of the financing methods available to a company, other than a contribution to share capital or a bank loan.
But what exactly is a shareholder current account? What is it used for and how does it work? Find out more about this alternative method of financing, with its many advantages!
What is a shareholder current account?
Definition
A partner's current account is a loan granted by a partner to a company of which he is a member. It can be granted when the company is set up, or at any time during its lifetime.
It may take one of the following forms:
- a contribution to the current account by transfer
- or the temporary waiver of amounts owed by the company, such as dividends.
This advance is generally remunerated by interest.
💡 Note that this is not an account in the bank account sense, but in the accounting sense: it is therefore a set of accounting entries. A partner's current account is opened for each lender.
Who can have a shareholder current account?
Any shareholder or partner can open a partner's current account, regardless of the proportion of capital they hold.
What is a shareholder current account for?
This alternative method of financing to bank loans and leasing is particularly useful for :
- obtaining cash quickly to finance a project or deal with unforeseen circumstances if you need cash to get through a difficult period;
- strengthening shareholders' equity in order to present solid guarantees to an investor or a bank.
The shareholder current account on the balance sheet
Although sums paid into a shareholder's current account are a source of funds, it should not be forgotten that by their very nature they are debts.
They are therefore entered on the liabilities side of the balance sheet under liabilities, on the line " Borrowings and miscellaneous liabilities", as is any interest that may accrue on them.
If the accounts are frozen, the interest is shown under Other equity.
How does a shareholder current account work?
Drawing up a partner's current account agreement
Although this step is not formally compulsory, it is nevertheless highly recommended!
The agreement is a document that sets out the various terms and conditions of the shareholder current account, providing a legal framework. It is signed by the partner contributing the funds and by the company, and makes each party liable if the provisions laid down are not complied with.
It may contain the following information
- the identities of the signatories to the agreement,
- the duration of the agreement
- the amount contributed
- the planned remuneration
- the repayment terms,
- the temporary freezing of the shareholder's current account contribution for the purpose of obtaining a bank loan (as it serves as a guarantee),
- the transfer of the shareholder current account in the event of a share transfer.
Interest on the shareholder current account
The interest paid on the advance is :
- mandatory if the contribution is made by a legal entity,
- optional for individuals.
The interest rate is set by both parties and must comply with three rules:
- it must be fixed throughout the period
- be reasonable
- be set out in writing.
Terms of repayment of the advance
Unlike a contribution of share capital, in principle the partner may request repayment of the advance on the partner's current account without the company having been dissolved:
- at any time
- on simple request
- without providing any particular justification.
However, if specific terms and conditions have been laid down in the agreement, these must be respected:
- the minimum date set
- the procedure for requesting reimbursement
- the period of notice,
- whether or not repayment can be made in instalments,
- the conditions for refusal (for example, if cash flow falls below a certain threshold).
👆 Furthermore, the request must not be made with the intention of harming the company.
Partners' current account in debit: possible?
A debit partner's current account is a loan granted to a partner by his company, which is unconditionally possible in SNCs and non-trading companies.
On the other hand, it is only possible for legal entities in :
- SARL,
- SAS, SA
- SA,
- and SAC.
However, this option is not available to intermediaries, ascendants, descendants or spouses of the legal entity.
Arrangements in the event of a partner's death
If a partner dies, what happens to the sums paid into the partner's current account?
In the same way as a debt, it is transferable to the heirs. The heirs must then follow the terms of the agreement.
Taxation: focus on the deductible rate for shareholders' current accounts
How should interest paid on a shareholder's current account be treated for tax purposes?
👉 On the company side, this interest can be deducted from profits, provided that two conditions are met:
- that the company's share capital is paid up, i.e. that the promise to contribute has been fulfilled,
- the rate set does not exceed the thresholds set by the tax authorities (if it does, the excess must be added back to the profit).
By way of example, here are the reference rates for a financial year ending on :
- 30/09/2020 : 1,20 %
- 31/10/2020 : 1,19 %
- 30/09/2020 : 1,19 %
👉 On the individual shareholder side, interest is considered to be income from real estate capital and is therefore subject to income tax.
👉 For corporate shareholders, interest will be :
- either considered as financial income, and therefore subject to corporation tax (IS),
- or subject to income tax for shareholders.
Shareholder current accounts: undeniable advantages
A shareholder current account is a relatively flexible procedure that is quick and easy to set up, and offers a number of advantages...
... for the company :
- it avoids the need for a capital increase, which is a cumbersome procedure,
- it is easier to obtain a bank loan or other external financing by temporarily blocking the funds as security,
- the cost is lower than a bank loan.
... and for the partner :
- the funds are more easily recoverable than a capital contribution,
- the advance is remunerated.
What about you? Have you ever used a partner's current account to find finance for your business?
Article translated from French