The associate’s current account quickly finances a company without changing its capital. Remuneration, taxation and reimbursement: the rules to master.
The associate current account is a financing tool widely used by businesses. It allows a partner to temporarily provide funds to his company without carrying out a capital increase and without modifying the distribution of shares or shares.
Simple to set up, this mechanism must nevertheless be properly supervised. Origin of the sums, remunerationdeduction of interest, reimbursement or risk of debit balance: several rules must be mastered by both the partner and the manager.
What is an associate current account?
The partner’s current account corresponds to the sums that a partner puts or leaves at the disposal of his company, in addition to his contribution to the share capital.
Legally, it is a loan granted by the partner to the company. The company therefore becomes a debtor to him, while the partner has a debt on the company.
In the annual accountsthis sum appears on the balance sheet liability among the company’s debts. It is not part of the share capital nor, in principle, of the equity.
Unlike a capital contribution, the current account advance does not give the right to new units or shares. It therefore modifies neither the voting rights, nor the distribution of capital, nor the control of the company.
It is also intended to be reimbursed, subject to any conditions provided for in an agreement.
How to fund an associate current account?
A current account can be funded in different ways.
The most frequent situation corresponds to the direct payment of a sum of money into the bank account of society. This advance can be used to finance the start-up of the activity, an investment or a one-off need for cash.
The current account can also be credited when a partner personally pays a business expense on behalf of the company. As long as this expense has not been reimbursed to him, the company owes him the corresponding amount.
Certain sums owed to the partner may also be voluntarily left at the disposal of the company. This may include:
- remuneration not deducted;
- of dividends regularly decided but not paid;
- interest left on the account;
- professional expenses not yet reimbursed.
In each situation, the origin of the sums must be clearly identified and justified by accounting, banking or legal documents.
Why use a current account rather than increase capital?
The main advantage of the associate current account is its flexibility.
A capital increase generally requires a collective decision, a modification of the statutes and various legal formalities. It can also modify the distribution of titles between the partners.
The current account advance allows, on the contrary, to quickly strengthen the company’s cash flow without changing the share capital.
It can be used in particular for:
- finance the launch of an activity;
- deal with a cash flow gap;
- support an investment;
- complete a funding banking;
- temporarily support a period of development.
This flexibility, however, has a limit. Unless blocked or otherwise agreed, the sums can in principle be claimed by the partner. The current account therefore constitutes a less stable resource than social capital.
The debit current account: a risk to monitor
The current account is in credit when the company owes money to its partner.
He becomes a debtor when the partner owes money to the company. This situation can particularly arise when a partner withdraws more funds than he brought in or when personal expenses are covered by the company.
A debit current account must be subject to particular vigilance. According to the form legal of the company and the status of the person concerned, certain loans, overdrafts or advances granted by the company to its partners or managers are prohibited.
A debit balance can also reveal use of corporate cash for personal interest. In the most serious situations, this may result in tax, legal or criminal consequences.
Regular monitoring of current accounts helps prevent a withdrawal, a personal expense or an accounting allocation error from creating an irregular situation.
Can the associate current account be remunerated?
The partner can make his funds available to the company free of charge. He may also receive interest in return for the financing granted.
Current account remuneration is not automatic. It must have been provided for between the partner and the company, preferably in a written agreement.
This agreement may in particular specify:
- the amount of the advance;
- the applicable interest rate;
- the method of calculating interest;
- their payment frequency;
- reimbursement conditions;
- the possible existence of a blocking period.
Depending on the legal form of the company and the functions performed by the partner, this agreement may also fall under the procedure applicable to regulated agreements.
Is interest deductible for the company?
The interest paid to the partner may constitute a deductible expense from the company’s tax results.
This deduction is, however, subject to several conditions.
The share capital must in particular have been fully paid up. This means that the partners must have actually paid all of the cash contributions that they have undertaken to make.
The deduction is also limited by a maximum tax rate allowed. This rate is determined from references published by the administration and varies according to the period as well as the closing date of the financial year.
The company must therefore check the applicable rate each year. You should not automatically repeat the one used during the previous exercise.
When the rate paid to the partner exceeds the tax limit, the excess portion may remain due to the partner. On the other hand, it will not necessarily be deductible from the company’s tax results and may have to be reinstated.
In certain situations, notably between related companies, a higher rate may possibly be justified by market conditions. This justification must then be sufficiently documented.
What taxation for the natural person partner?
For a natural person associate, the interest received on a current account generally constitutes income from movable capital.
They are in principle subject to the flat-rate levy applicable to capital income, according to the rate in force at the time of their payment.
The partner can also opt for taxation at the progressive income tax scale when this option is more favorable.
This option is global. It does not only concern current account interest, but all income from movable capital and movable capital gains falling within its scope for the year concerned.
The choice therefore depends in particular:
- the overall level of household income;
- their tax bracket;
- other capital income received;
- possible charges or special situations.
When the lending partner is a legal entity, the interest received is recognized as financial income and taxed according to the tax regime applicable to this company.
Can the associate request reimbursement at any time?
In the absence of a specific agreement, statutory provision or blocking commitment, the associate’s current account is in principle reimbursable at any time.
The partner can therefore request reimbursement of his debt without waiting for the close of the financial year or the realization of a profit.
However, this possibility can weaken the company. A large, unexpected reimbursement request can create cash flow stress, even when the company is profitable.
The manager must therefore not consider the sums deposited in the current account as definitively acquired resources.
When the company cannot repay immediately without compromising its financial situation, it is preferable to anticipate and organize the terms of return of funds with the partner.
What is the purpose of a blocking agreement?
A blocking agreement provides that the associate undertakes not to request reimbursement of all or part of his current account for a specific period.
The blockage can be scheduled until a specific date or until the occurrence of an event, such as the repayment of a bank loan.
This agreement helps stabilize the company’s resources. It also reassures banks, which frequently request that partners’ current accounts remain blocked for the duration of financing.
In the financial analysis of a company, a blocked current account can thus be considered as a more stable resource and come close, under certain conditions, to quasi-equity.
The blocking must, however, have been accepted by the partner. The company cannot decide unilaterally to make sums normally refundable unavailable.
Why formalize a written agreement?
Even when it is not systematically obligatory, a written agreement makes it possible to secure relations between the company and the partner.
In particular, it allows us to clearly answer the following questions:
- Is the current account paid?
- What interest rate should be applied?
- When is interest paid?
- Can the associate request an immediate refund?
- Is there a notice period?
- Can the company defer reimbursement?
- Is the current account blocked for a certain period of time?
The agreement also makes it possible to demonstrate the reality of the financing and the consistency of the conditions adopted in the event of a tax audit or disagreement between partners.
In corporate groups, this formalization is particularly important. The financial conditions must correspond to the economic reality of the operation and respect the arm’s length principle.
The company must therefore be able to justify the amount of financing, its duration, its rate and its economic utility.
An effective tool provided it is properly supervised
The associate current account is a particularly flexible financing instrument. It allows you to quickly provide cash to a company without changing its capital and without immediately initiating major legal formalities.
This simplicity does not, however, exempt from rigorous monitoring.
The company must identify the origin of the sums, keep the supporting documents, regularly check the account balance, regulate any interest and anticipate reimbursement requests.
It must also verify the conditions of tax deductibility each year and comply with the applicable reporting or legal obligations.
Properly managed, the associate current account can effectively support the development of a business. Poorly followed, it can on the contrary create tensions between partners, weaken cash flow and lead to tax or legal risks.
