Settlements with shareholders

What it means

Settlements with shareholders is the area of accounting that records mutual receivables and payables between a company and its shareholders or members. In the Slovak chart of accounts, account groups 35 and 36 are used for this, for example an account for subscribed capital receivable, one for liabilities from profit distribution, and accounts for other receivables from and payables to shareholders.

Typical items are unpaid contributions, a profit share approved but not yet paid after profit distribution, shareholder loans to or from the company, financial assistance, additional contributions to capital funds before they are booked, or money a shareholder has taken out of the company without a clear legal basis.

Separating these items from ordinary receivables and payables with customers and suppliers matters for the clarity of the balance sheet. Readers of the statements, banks and investors can see what financial ties exist between the company and its owners, which helps them assess the true financial position and risks.

How it works in practice

Every movement between the company and a shareholder should have a legal basis and a document: a loan agreement, a general meeting resolution on profit distribution, a contribution agreement or a payment voucher stating the purpose. Without them, money taken out by a shareholder may be treated as a disguised profit distribution with tax consequences.

Loans between the company and a shareholder are related-party transactions. Interest should be at arm's length under the transfer pricing rules, otherwise the tax administrator may adjust the tax base. An interest-free loan to a shareholder may also be a non-cash benefit. Terms are best agreed in writing.

At year-end we recommend confirming balances with shareholders, much as with balance confirmations for business partners. If a shareholder has owed the company money for a long time without repaying, the auditor or bank will ask whether it is recoverable. Negative balances should be checked for bookkeeping errors.

What to watch out for

The most common mistake is using company money for private purposes on the understanding that it will be settled later. A receivable from the shareholder then grows on the settlement account with no agreement or due date. In an inspection the tax administrator may treat it as a profit share, and if the company becomes insolvent the trustee may demand its repayment.

Mind the Commercial Code restrictions too. Payments to shareholders outside profit distribution, including disadvantageous loans, may be prohibited, especially if they threaten the company's solvency or the company is in crisis. Management is liable for breaches. Before larger transactions with shareholders, it is worth consulting an adviser.