Withdraw private equity form company

1

Apologies if this is a really dumb question, but I’m trying to withdraw money from the company funds into private funds (I hope I get the wording correct, English is not the language I use). As my company is a freelance (one-person), I cannot pay myself salary, the only way is to withdraw equity (its how the law here works).

Currently I added an extra account in ‘Equity’ called ‘private’ which basically allows me to transfer funds from the company bank account to the private bank account. Now the problem is that this ‘private’ equity should not be part of the “total equity” as it is no longer part of the company’s equity. Can you tell me what the ‘Manager’ way is of getting money ‘out of the company’?

2

I think the most elegant way to handle this is the @Tut’s way. Go to Chart of accounts and rename Retained earnings account to Owner's equity.

When you withdraw money from the business, simply allocate the amount to Owner's equity account.

Now, I know what you are thinking… the account balance of Owner's equity will keep growing indefinitively, right? It will not actually. Profits or losses will be automatically flowing into Owner's equity which means they will constantly keep offsetting your drawings or contribution of funds. Owner's equity will then pretty much represent your share the business owes you or you owe to the business.

3

@jorisb, an important concept to remember is that as a sole proprietor, money you take from the company is now your personal money, no longer having anything to do with the company. Thus, it should not be reflected anywhere on the company’s books. In that sense, the money you draw from the company is similar to money you pay to a supplier–it is gone. Your supplier sold you something. You contributed your time and talent and got money in return.

The reason the method @lubos described is so convenient is that as a sole proprietor, all retained earnings, investments of capital, profits, and so forth, can be handled in one account, which in Manager is automatically present. You have no need to set up capital accounts, drawing accounts, wages or salary accounts, or anything else. You own the company, so everything the company has is part of your equity. If you withdraw funds by writing yourself a check from the company’s bank account, you are reducing your equity.

Another convenient aspect of handling things this way is that when you put actual or imputed money into the company, you can do that via Expense Claims. Periodically, you can clear Expense Claims to Owner's Equity. For example, mileage driven in your personal vehicle might be a deductible expense for taxes, even though you never actually pay anything to anyone for the miles driven. Nevertheless, you have invested the use of your car into the company and effectively increased your equity.

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4

Thank you both for this elaborate answer. Need to chew on this a bit to see if i can fully comprehend. One part i have difficulty grasping is that ‘retained earings’ changes every time there’s a sale or invoice. Such mutations (for me) should stay part of the company equity, not personal equity, or else my tax forms will go crazy. Please tell me if i misunderstand this. Basically i just want to give myself €1000 every month, but pay income tax only once.

I think, if i use expense claims, these behave like other bills, and no longer count for income tax, which is also not allowed here.

I agree, this action takes money out of the books, and makes these books ‘unbalanced’. My current method is far from ideal, as indeed this private equity now starts growing, and makes a mess of total equity.

Again, thanks very much for your input

5

Things are not as complex as you think. And some of your initial impressions are incorrect.

Remember that Manager is doing accrual accounting, unless you set up reports to be on a cash basis. Thus, when work is performed and the sales invoice is created, revenue is recognized, even though you have not received any money from the company. The account receivable created by the invoice is an asset, which affects your equity. But initially, you carry the asset as an account receivable to show that it is still owed to you. When you receive payment, you transfer the asset to a bank or cash account, but you have not changed net equity. I recommend http://www.accountingcoach.com as an excellent tutorial on this and other principles.

Imagine that you started your company without any personal investment. Your equity would be zero, as would your bank balance. After you do some work, you’ve made an investment of your time. You invoice the customer for 1,000 Euros and have created an asset, increasing your equity. The customer pays you the 1,000 Euros and you transfer 900 to your personal bank account. Your equity in the company is now 100 Euros. But as a sole proprietor, you would (at least in all jurisdictions I know) have to pay tax on the full 1,000.

Expense claims are not like other bills, because no money went in or out of the company. There can be two types: actual payments and inferred accruals, like mileage or per diem. Whichever type, however, an expense claim is like a contribution of capital. You have spent personal funds on a company expense without the extra step of first making a direct contribution of capital and then paying the expense from a company account. They are a very handy way to separate personal spending from company spending without always having to have a company check, credit card, or cash wallet in your hand.

Please be assured, your books do not become unbalanced. The method being described is what keeps equity in the company from growing endlessly. Try a couple sample entries to see what happens to the Summary. (Be sure to undo them afterwards!) Or create a second, “test” company and play around with these concepts.

6

I’ve tried this quite a few times, and just can’t get it to work in the way you describe. The guides on the website maybe outdated or I don’t understand them (I can’t find the ‘expense payers’ section anywhere). But whatever I try with expense claims, I keep on either changing my profit&loss statement (which as you mention I cannot do), or my suspense account increases…

I’m really soory to keep bothering you about this, but would you be a ble to give me a complete example on how to use these expense claims to extract money from my company? I guess making a personal investment in the company would be the same thing , just the other way around. But I can’t get that to work either :frowning:

7

Let me apologize if I have confused you, @jorisb. I have discussed two separate but sometimes related concepts in my posts as I’ve tried to answer your questions. Perhaps I did that because you were mentioning the ways you tried to take money out of your company. But I interpreted your questions as being about two different subjects. Anyway, I’ll try to clear things up, if I can.

To take money out of the company for personal use, you must go to either a bank account or a cash account and Spend Money. Either way, you will be crediting the bank or cash account. Manager takes care of that automatically. You must decide which account to debit. In this case, you should debit an equity account. If you followed @lubos’s recommendation and renamed Retained Earnings as Owner Equity, that’s the account to choose. If you are using some other equity account to show your equity in the company, choose that one. The result will be that your bank or cash account is lower, and so will be your equity account, by the same amount. Expense Claims is not involved in this process.

Expense Claims is a way to record expenses you pay on behalf of the company from your own personal money. For example, you might meet a client and decide to buy her lunch. Or you might buy an airplane ticket for a business trip with a personal credit card. Or you might be able to deduct, for tax purposes, money for the distance you have driven your personal vehicle. In all these cases, no company money went in or out, but the company is entitled to the expense. And you (or your employee, if similar expenses were paid by an employee) are entitled to reimbursement in some way.

So you submit an Expense Claim in Manager. To use this module, Expense Claims must be enabled in the left navigation pane. To do this, click Customize, check the box next to Expense Claims, and click Update.

Now, you need authorized payers. Click on Settings, then Expense Claims Payers, and add yourself or anyone else you want to be able to spend money for the company in this way. Note that if you are using Capital Accounts, any member with a capital account automatically appears in Expense Claims, and does not need to be listed as a payer. If you do that, their name will appear twice when it comes to selecting the payer.

Now imagine that you spend 100 EUR from personal funds on something for the company. Go to Expense Claims, click on New Expense Claim, and fill in information for the transaction. Choose the desired payer from the dropdown list. Allocate the expense to whatever expense account you would normally choose, whether Travel, Motor Vehicle Expenses, or anything else. Click Create.

Now, if you look at the Summary, you will see a liability account, Expense Claims, with a balance of 100 EUR. This is a liability of the company because the company owes someone 100 EUR, because that person spent money for the company. So far, nothing has happened to equity.

Periodically, you should reimburse expense claims payers if they are employees. When you do that, Spend Money from a bank or cash account and debit Expense Claims and the appropriate payer sub-account. If you wish, you can reimburse yourself this way.

Another way to clear the Expense Claims account of items you paid for yourself is to use a journal entry. In this case, debit your Expense Claims account and credit Owner Equity (or whatever you are calling the equity account). This is financially equivalent to making a contribution of capital. Instead of paying money directly into the company, you paid a company expense directly.

To summarize, money can be taken out of the company by spending money from a bank or cash account and debiting Owner Equity (or whatever you call it). Money can also be put into the company by receiving money in a bank or cash account and crediting Owner Equity. Expense Claims are a way of paying for company expenses with personal funds. When used by an owner, they are equivalent to a cash contribution. They can be cleared by transferring the amount to Owner Equity or you can reimburse yourself in cash.

All that took more time to type than to make a whole year’s worth of transactions involving equity in your company. Hopefully, my explanation has helped.

8

Now that was a really well put explanation @Tut! For my part, thanks so much, you’ve given me a simple way as a new user to manager and not having more than basic accounting knowledge , to handle my drawings.
Thanks for the accounting link as well.

9

THanks Tut, this is really helpful :slight_smile:

10

I have to say, now that I understand this, it works like a charm. In my circumstances, I use Journal entries to balance the expenses , and booked changes in my bacnk statement also to expenses. This means that for each ‘salary payment’, I need to do two things, but I can imangine that the balancing journal entry can be accumulated to do once a year. This is probably even better as you can see what kind of money you can take out of the company in one easy line. Excellent!

11

I am glad you like this approach, @jorisb. I am not a professional accountant, and it really grew out of my puzzlement over the complexity of the standard accounting cycle, in which you record withdrawals from a drawing account, then have to close the drawing account each accounting period. Likewise, with Manager, there is no longer a need to create to close income and expense accounts to an income summary account and immediately transfer that to equity. All these were methods to reduce errors when everything was manual, I think.

12

This was such a useful thread, it has helped me with my questions. I do have one additional question to it to make sure I understand it all correctly. When using the “expense claim” when purchasing items for the business from private funds instead of the business’s funds (soletrader paying with own personal cash for a packet of screws for timber furniture business), the “expense claims” is used instead off “cash transaction” They replace each other rather than off-set each other. Is that correct? I have a lot of these entries as i am just starting out and have a lot of expenses, but no income coming in yet. Thank you

13

Yes. Then, as a sole trader, you must clear the liability created for the company, which owes you money because you spent your own. If you are using a capital account to record your equity and relied on your capital account ownership to establish you status as an expense claim payer, the claim will go directly to your capital account as an equivalent contribution of capital. If you defined yourself separately as an expense claim payer (because you are using some other form of equity accounting), you would clear the liability in Expense claims to Owner’s equity with a journal entry. Or, you could use a bank or cash transaction to reimburse yourself.

14

Thanks for picking up my question so quickly. :smiley:

I have just had a play with the concept in a test business.

Question 1:
Could you tell me if I do this correctly. I believe so. It looks to me this is easier than having to do journal entries) but I’m a novice, and if you feel I’d be better of to explore a different way of doing this I am more than open to listen to your suggestions.

Here goes:

Under Capital Account I have created “myself” Regina.
This way I can create “expense claims” when using my own money to fund business expenses (in lieu of business earnings).

To reimburse myself once the business is generating income I do the following:

  • I go into the capital account and check the amount that needs clearing (total of expense claims for Regina)

  • I then go to make a cash transaction (or bank transaction)

  • Choose “Spend Money”

  • Payee: just type regina

  • Description: Clearing of Expense Claim

  • Account: Capital Accounts

  • Next box: choose myself

  • next box: choose “Funds Contributed”

  • Next: add amount I want to clear

  • Press CREATE

This then decreases the balance sheets on the left (they now only reflect the money that the business has made, and the money the business has spend (as I have just cleared the money that I have put into it).

Also, this then alters the Profit and Loss.
Total Income remains the same, No changes in “less expenses”-section,
Net Profit remains the same

I believe this is correct?

Question 2) Would it make sense if it shows as a liability to the business as it needs to be paid back?

15

On Question 1: don’t allocate to Funds contributed; that’s for when you put money into the company. Allocate to Drawings, which is for when you take money out.

On Question 2: You need to be clearer. Would what make sense if it shows as a liability? If you are referring to the Expense claims account, yes. But if you posted the expense claim to yourself under the Members type, the claim will not appear there. It will go directly to your capital account. If you also created yourself as an expense claims payer, you may see your name twice in the dropdown list when you enter an expense claim. One is for you as an expense claims payer, the other for your capital account. You must do one or the other approach; you cannot mix them. Make sure you have studied this Guide: Manager Cloud.

16

On Question 1: don’t allocate to Funds contributed; that’s for when you put money into the company. Allocate to Drawings, which is for when you take money out.

Thank you. So if I enter the expense claim as described though choosing “drawings” instead of “funds contributed”, I do it correctly?

On Question 2. Sorry I re-read my question and it was indeed unclear… Apologies. But yes you interpreted my question correctly. But I get it now. THanks so much for your help.

17

You’ve confused your terminology. Your Question #1 was not about entering the expense claim at all. It was about reimbursing yourself. If you substitute Drawings for Funds contributed in your bulleted list of steps in Post #14 above, you will have it right.

18

Thanks for your help. Much appreciated :blush: