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Old 31st August 2011, 08:46 AM   #1
oldmandusty
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Default How Do I Access My Company's Profit

let's say after deducting all the costs from my company, there's a $100 left in my company's bank account.
The company is incorporated with business number, gst/hst number, etc
I am the only acting director of the company
I am the only signing officer on company's bank account
You get the picture?

Now, at the end of the year, on the $100 left in the bank account, say I pay the 15% corporate tax on the $100 profit. So I"m left with $85.

Can I simply take this $85 out of my company's bank account, or is that my personal income now and do I have to pay 40% or whatever it is on the $85?


thanks in advance

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Old 31st August 2011, 12:42 PM   #2
BeTheBest
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Hi oldmandusty!

From what you're saying, I think you may be a little confused. But the actual answer will lie in how your company is set up.

First of all, please understand that I am not an accountant and this should not be considered as accounting advise. Matter of fact, I strongly urge that you get an accountant.

With respect to how your company is set up, it's pretty important to know if you operate as a CORPORATION or a SOLE PROPRIETOR. Although there are many differences, basically understand that a CORPORATION is treated like a separate entity. Like another person.

If you operate as a SOLE PROPRIETOR, then YOU are the company.

Having said that, you will need a 'set of books and records'. That means, you will have a Balance Sheet (but I am not going to talk about that now...) and you will have a P/L Statement or PROFIT and LOSS statement.

On the P/L, you will have
  • Gross Revenues - All the money you took in
  • Minus Cost of Goods Sold - assuming you sell some hard goods
  • Minus Operating Costs - All the costs associated with running the business like telephone, vehicle, rent, etc.
  • TOTAL is your PROFIT (if it's a plus) or your LOSS (if the result is negative)

Make sense so far?

If you operate as a SOLE PROPRIETOR, you are the company and you will submit that P/L statement with your tax form and pay the associated taxes on the BOTTOM LINE. If it's a loss, you can use that loss against other income. (REMINDER- You will need an accountant. I am not an accountant and this is NOT advice)

If you operate as a CORPORATION, then the bottom line is the COMPANY PROFIT. Anything that you 'take out' of the company would be included in the OPERATING EXPENSES. In other words, you become an expense of the company.

Now again, there are other methods (like dividends and other things) that you can do to take money out and limit the amount of tax you pay. But the basics are determined by how you operate. As a sole proprietor, you pay tax on everything. If it's a corporation, your wage can be part of the operating expense or you can take money out in other ways that will reduce the tax implication.

Hope this helps! Gook luck!

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Old 31st August 2011, 12:51 PM   #3
oldmandusty
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BeTheBest,
Thanks for the reply!

I've got the balance-sheet etc all in place right now. We keep track of all the money and all the money out. The expenses are deducted properly (the outsourced contractors, office costs etc)

Our balance-sheet is going to show a good chunk of proift after all costs this year. I'm ok with paying 15% tax on that profit.

I guess I can reduce the profit, by paying myself a salary. But paying myself a salary will mean, I will loose a very good chunk of that money to Taxes. So paying myself a salary is out.

My accountant is suggesting that I take a loan from the company. But a loan is just that, a loan. I want to know if I can simply take that profit out of the company without any consequences

I do have investment options, if I can't simply take the money out of course... but I thought may be you know of a simpler way of accessing company's profit.

thanks!

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Old 31st August 2011, 01:05 PM   #4
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BTB has done a nice job of painting the picture, so I'll just chip in with a extra 2 cents...

OldManDusty, I'll continue with the simplifying assumption that you kicked it off with; viz, that your company's residual cash in the bank = its net taxable income. The two are rarely precisely the same, but for the sake of illustration it'll do for now.

If you are a C corporation, then your corporation will pay the $15 corporate income tax on the $100 taxable income (a bit more, if you're in a state with a state-level corporate tax). Then the residual $85 can come out to you as either a salary check or as a dividend. On the former you'll pay personal tax at your ordinary rates; on the dividend you'd pay personal tax at your capital gains rates.

But in a C-corp scenario I'd suggest a different approach: write yourself a $100 salary check instead. This will zero out the corporate profit thereby sparing the $15 corporate income tax. In the aggregate (considering you and your company together) you'll pay less tax overall this way.

But if you're set up as an S corporation, then the corporation will owe no tax on the $100 net profit. Instead, you'll pay personal income tax on the $100 whether you withdraw it or not. The other side of that coin is that you can then pull the 100 bucks out into your own pocket at any time, tax free, since you've already paid the tax on it.

That was very broad-brush, but I hope it helped a bit.

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Old 31st August 2011, 01:30 PM   #5
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ArcSine,
Great post, thanks!

Yes, it's a "C" corporation and to keep things simple I'm really talking in broad general terms with the absolute super simplified example I provided.

If this was really an "S" corpration, i'd pay a whole lot more since the profit would be really my personal income. am I correct on that?

If I understand you correctly, I can pay myself a 100% divident, and only pay the "capital gain" tax?? oh wow! I'll investigate that further... hope that works. You will have to change your name to mr. genius if that is really the case

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Old 31st August 2011, 02:36 PM   #6
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Quote:
My accountant is suggesting that I take a loan from the company. But a loan is just that, a loan.
Again, I am not an accountant... he is correct. You can borrow money from anybody (or company) from anywhere in the world. It's up to the agreement. But typically, if you borrow the money, you need to pay it back. From what I know, that has to happen WITHIN A YEAR. Otherwise, it's considered your income.

Quote:
I want to know if I can simply take that profit out of the company without any consequences
Sure! If you don't consider jail time a consequence! Ha!

There are ways... I am not going to discuss them here. If you want to PM me, I will share an idea or two.

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Old 31st August 2011, 04:41 PM   #7
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OldManDusty, the optimal (i.e., tax-minimizing) choice depends on the effective tax rates that will apply to (a) your corporate profits; (b) your personal ordinary income; and (c) your personal capital gains income.

You'll also need to determine if dividends paid from your corporation would be considered "qualified" or "ordinary" dividends. Capital gains rates apply to the former, whereas the latter are taxed as ordinary income on your personal return. Your tax advisor, familiar with your corporation, could tell you which one applies in your case.

Then the final ingredient in this cocktail is what kind, if any, of state tax rates apply to the foregoing.

As a rough back o' the envelope (cocktail napkin?) calc (after determining your effective rates), you might wanna plug your rates into the following comparison. Letting Po, C, and Pcg denote, respectively: Po = your personal rate on ordinary income; C = the marginal tax rate for your corporation; and Pcg = your personal rate on capital gain income; then...

If Po > C + Pcg - C x Pcg

...(that is, if your personal ordinary rate exceeds the sum of your corporate rate and your personal cap gain rate, less the product of the two), then the "dividend" strategy would result in the greater amount of after-tax net cash in your pocket.

If on the other hand the right-hand side of that inequality exceeded your personal ordinary rate, then the salary strategy trumps the dividend strategy.

Take note of a couple of things: For one, those rates I've generalized above all are to be the effective marginal rate, including both federal and state, as applicable. Your effective marginal rate will depend on, among other things, stuff such as your other income (sources, amounts, types); your various personal deductions; etc. Again, your tax preparer can help you dig up these rates if need be.

For another, there are no tax rules that aren't on the table for possible changes at the whim of Congress, so do all calculations in pencil rather than ink

Gotta wrap it, but do take note of BTB's good advice re the loan route: It can be a viable strategy, but it's a short-term fix, and merely shifts the timing of things. If you borrow from your corp, you'd be wise to document the loan with a proper promissory note, and provide for a market-reasonable interest rate and repayment terms. Otherwise you risk having IRS recharacterize the borrowing as income to you (which usually happens 2 or 3 years after the fact), so you'd be looking at not only an unexpected tax hit but penalties and interest to boot. Fun, fun indeed.

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Old 2nd September 2011, 08:39 AM   #8
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ArcSine,
wow, once again, another great post!

K so far, the options to access my company's profit are:
1. Pay myself a salary, and loose close to half of it to Tax man
2. Pay myself a dividend; need to investigate qualified vs. ordinary dividend
3. Taking a loan (not smart... it's just prolonging the disaster)

I simply didn't even know about #2. I wonder if there are other ways of taking the money out with paying as little as possible to the tax-man.

I know, I know, deduct this and that... but after deducting a whole lot, I still end up with some Cash in the account, and I simply want that money out, at the end of each fiscal year (this is for super simplifying the matter... of course some of the money will be pushed back to the company for its growth)

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Old 16th September 2011, 05:40 AM   #9
anntoro
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Hello everybody, I have just establish a small company and I have only a brief idea to manage profit of the company. I am really thankful to you because I got the maximum information from this forum.

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Old 17th September 2011, 09:13 AM   #10
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As a c-corp, your business is its own entity. Thus, you are the only employee. You would pay yourself a salary. If there is profit left over, you can either plow it back into the company or pay it out as dividend.

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