Businesses should be cash-generating machines. Ideally, owners want to be able to set them up, ensure that everything is in place, and then leave them to run without having to pay much attention to them. In other words, they should mechanize money generation.
If you’re in a lucky enough position to own a profitable business, then the next question is how to extract money from it. Interestingly, it turns out that you have multiple options in this regard. You can, obviously, just transfer it from your business bank account to your personal one, but there are other ways of doing it too.
Draw an Owner’s Salary
One option is to draw an owner’s salary. In a sense, you’re just paying yourself, settling on whichever figure you think will best suit your lifestyle.
It’s important to remember that this salary can be literally anything. It doesn’t even have to reflect the salaries of other people in your organisation. They’re all earning the market rate but, since you’re the owner, you’re free to pull out whatever you want.
Owner’s salary represents a profit, so you’ll have to declare this on your annual income statement (along with the rest of the money you earned for the year from other sources, such as property or regular employment).
Put It Into an Investment Fund
If you can’t find ways to reinvest money in your own company, you’ll want to consider plowing it into an investment fund. This way, you can continue growing your wealth and avoid the specter of inflation – something that’s hitting hard right now.
According to Prio Wealth Management, there are multiple investments you could make with the funds you withdraw. They key, they say, is to find a way to invest and grow your wealth that will work for you, not somebody else. This means looking for opportunities that will support the lifestyle that you want to have, not just endlessly aiming for more money.
If you are already independently wealthy (or you have a large budget), you can take a year-end bonus instead. You should pay these, once you calculate your business profits for the year.
Just as in other businesses, you should pay yourself a bonus in line with the amount of money that you made. If you were successful, then your bonus should be higher. If they weren’t, it should be lower.
Remember, even if you are taxable on all your profits, you don’t necessarily have to withdraw them from the business. If you use them in the following year for investment purposes, you may be able to claw back overpaid taxes.
Take a Dividend
A dividend is essentially the same as taking a salary, though not as regimented. You can take dividends whenever you like, instead of on a monthly or quarterly basis, as with a salary.
Taking dividends may be beneficial for some company owners more than others. For instance, you might notice that your profits are higher this year and you don’t need to reinvest the money. If so, you might take them out as pure profit and put them elsewhere.
Just remember: when you pay yourself a dividend, you’re usually subject to a different rate of tax compared to, say, income.
Taking deductibles isn’t really paying yourself, but it is a great way to reduce your overall tax bill, whether for your company’s profits or personal income.
Each year, keep a record of everything that you buy associated with your enterprise. Then check these against qualifying expenses. You’ll usually find that you can deduct many of your purchases from your taxable income, reducing your overall outlay to the government. This approach doesn’t involve taking an income per se, but the net effect is the same: you have more money in your pocket.
You can also take an income from your company by using it as a vehicle to purchase tax-reduced paid benefits, such as health insurance. Paying for health insurance before tax is often much cheaper than after tax, again, keeping more money in your pocket.
Extracting money from your business is something that you need to learn how to do correctly if you want to be successful. Doing it the right way is essential. If you fail to properly account for your expenses or you draw down in the wrong way, you could put yourself at a tax disadvantage.
If you don’t know how to extract money from your firm in the optimal way, speak to an accountant. Find out what you need to do.