What is a contribution to a partner's current account?

The partner's current account is an instrument commonly used by a company's associates to temporarily provide additional liquidity.

The funds deposited, also known as current account contributions, are used to increase the company's cash position. They can be used to offset temporary cash shortages. Current account transactions are strictly regulated by French law.

Let's find out everything you need to know about trading in a partner's current account.

How does a partner's current account work?

Contrary to appearances, the operation of a partner's current account is particularly straightforward. It's a bank account into which associates temporarily lend funds to a company, in order to boost its cash flow. You need to be a partner or shareholder of the company to carry out this type of operation.

A partner's current account is often confused with an equity contribution. A contribution in a partner's current account is not a title deed (you do not become the owner of a fraction of the company's capital), but a claim that the company holds against one of its partners.

Any current account contribution is considered a loan. The company must reimburse the partner, and may also pay interest.

SARLs, SAs, SASs and SCAs are prohibited from debiting partners' current accounts. This practice is considered an abuse of corporate assets. It may be in debit in non-trading companies and SNCs.

How is a partner's current account treated in company accounting?

A contribution to a partner's current account is repayable at any time. From an accounting point of view, it should be debited from account 512 (Bank) and credited to account 4551 (Associate).

A repayment on a partner's current account is recorded in the accounts as follows: debit account 4551 (Partner) and credit account 512 (Bank). The associate may be reimbursed by receiving future profits in advance. In this case, account 4559 (Partner's deduction) is debited.

Interest on associates' current accounts is accounted for as follows: debit account 6615 (Interest on current accounts and deposits) and credit account 4558 (Associates - accrued interest).

Interest locked in at the end of the accounting period is accounted for as follows: account 66188 (Interest on sundry debts) is debited, and account 16888 (Accrued interest on other loans and similar debts) is credited.

Interest paid to the partner is a financial expense deductible from the company's income, provided the capital is paid up in full and the interest rate complies with the deductibility rate determined by the tax authorities. This rate changes every month, depending on the company's balance sheet date.

If the company remunerates its partner at a higher rate, the excess is not deductible from its income.

If the shareholder is an individual, he or she is subject to the PFU (Prélèvement forfaitaire unique, or flat tax) at the overall rate of 30%. If the shareholder is a legal entity, he or she is liable to pay corporation tax on the interest received. If the legal entity is subject to income tax, the interest is taxed via the income tax of its associates.

How is a partner's current account repaid?

Any contribution to a partner's current account must, in theory, be repaid. However, the request for repayment must be made in good faith and must not be abusive for the company.

In certain cases, the repayment may be adjusted.

The partners may unanimously agree to defer or stagger repayment.

Repayment terms may be governed by specific clauses in the bylaws:

• Lock-in clause: funds cannot be reimbursed for a specific period of time
• Notice period: A notice period must be observed before repayment of an advance on a partner's current account.
• Prior claim assignment clause: the shareholder can only obtain repayment of his claim after another creditor has been paid in full.
• Better fortunes clause: a creditor temporarily waives its claim until the company's ability to repay has been restored.
• Retrogression clause: the partner agrees to be reimbursed only if certain other creditors are paid off.

Shareholder current account contributions and reimbursements enable companies to temporarily top up their cash flow without having to resort to a bank loan. It's a particularly simple operation to set up, and very useful for the company's day-to-day financial management.