Managing partner's debt to the company

[hauberk]

So here's my question.

We are a small business with me and my partner having 50% share each. Let's call it company A. Also, my partner has 100% share n another business. Let's call it company B.

Recently we hired an employee who works 50% of his time for the first company and 50% of his time for the second company. As such, we decided that payment of his salary is to be divided between the two companies 50/50. But the actual salary payment (the full sum) is made from the bank account of the company A.

So we agreed with my partner that we will deduct his "salary share" from his dividends. What I can't figure out though, is how to better organize accounting of this thing. Currently, I've created a "current asset" account where to accumulate the amount my partner owes company A, and then I'm going to credit (or is it debit?) that account each time I pay out the dividends.

We do not use double-entry, only bank accounts + categories (expenses/income). Although the platform we use (Xero) allows double-entries and journals. I'm thinking about starting "declaring dividends" using double entry but then again how do I account for my partner's "debt" to the company A?

Sorry if that sounds stupid, but I really can't get it right I know the basics of accounting but I'm in no way a pro. So I'm hoping someone can give a piece of advice on how to solve this issue a simple way.

Thanks!

 

[Fidget]

Quite a strange post. It sounds as if it's two small unregistered companies and therefore not obliged to operate under GAAP yet, you mention dividends which is generally associated with registered companies that are bound by GAAP. But anyway...

Sounds to me as if you're trying to have a mishmash of cash and accrual accounting. Is there any particular reason why you can't just set up a standing order, or other form of automatic bank transfer from company B to company A for 50% of the salary cost at the frequency the salary is paid - monthly, presumably, instead of deducting what is owed from dividends payable to company B from company A?

That asides, it's a bit of a dodgy practice anyway since what happens if company A can't pay any dividends? And another thing is tax. Depending where you are in the world, company B might be liable for tax on dividends received from company A, so offsetting dividends payable with amounts due, thereby reducing dividends received by company B, has alarm bells ringing. On top of that, company A is showing a full time employee whilst company B isn't showing that employee at all therefore company A's taxable profit is lower than it should be and company B's is higher.

That's my ideas on it, will be interested to hear what others think.

 

[hauberk]

Hi Fidget,

Thanks for the answer.

Is there any particular reason why you can't just set up a standing order, or other form of automatic bank transfer from company B to company A for 50% of the salary cost at the frequency the salary is paid - monthly, presumably, instead of deducting what is owed from dividends payable to company B from company A?

Companies are in different countries and the company B only operates in the country where it is registered. Long story short, making a B -> A bank transfer will unnecessarily complicate accounting/taxation for the company B because it does not (officially) operate internationally. It's way easier to make the transfer the other way around (from A to B).

And another thing is tax. Depending where you are in the world, company B might be liable for tax on dividends received from company A, so offsetting dividends payable with amounts due, thereby reducing dividends received by company B, has alarm bells ringing.

Company A is an offshore entity, not paying taxes, operates internationally. Company B is a normal company (i.e. paying taxes where it operates).