Owner/Manager Remuneration: Getting Money out of Business

Now that you've learned a little about taxes, it's time to talk about getting money from your business into your personal bank account.

If your business is a partnership or a sole proprietorship, it's easy. You simply write yourself a check. You can draw as much or as little as you like. It really doesn't matter from a tax perspective, because you will be taxed on the net income from the business before your draw. Let's look at an example:

Sole Proprietorship

Revenue                             $75,000

Expenses                            (47,000)

Net income                         $28,000

You will take the $28,000 into your taxable income on your personal income taxes regardless of what you did with that $28,000. It could still be sitting in the business bank account or you could have spent it on Beanie Babies. You're still taxed on the $28,000.

If you own a corporation, the situation is a little different. A corporation is a legal entity separate from you, and you therefore must formalize the payment of money into your pocket.

Earlier sessions discussed dividends and salary, the two ways that you can take money from your business. You can't just borrow it from the business and never pay it back. The tax authorities will eventually catch up with you and tax you on it.

You must examine the decision on whether to take salary or dividends from the corporation in light of the tax consequences involved. Salary is deducted in the corporation but fully taxed in your hands. Dividends are paid out of after-tax income from the business but taxed more favorably to the shareholder. There are also issues regarding having room to contribute to your personal retirement plan and for paying premiums to pension plans.

Again, sit down with your accountant annually and review your remuneration package from a taxation point of view.