Transactions between the company and the business owner
When doing business as a company (a partnership or a limited company) it is necessary to keep in mind that the company and its owners are looked at as separate legal persons. The company may do transactions, agreements or other legal arrangements with its owners, but the scope of such activities is restricted especially in terms of taxation.
The company and its owners must always observe and follow market-based pricing in all their transactions. Shareholding does not entitle anyone to receive tax-exempt benefits from the company – in fact, shareholders must be on par with all other people in the same position. This is particularly important in limited companies: if a shareholder receives any benefit with monetary value from the company as a result of unusual pricing or without paying any compensation for it, s/he will be taxed for such benefits as hidden dividends. Tax consequences for hidden dividends are usually severe.
Owners may also have company’s assets at their disposal, or vice versa. This may be appropriate for the big picture, but it is important consider how such use is valued and to document the grounds carefully.
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