It is normal for businessmen to have the thought of getting a portion of their profit that they can see as compensation for their efforts. For proper documentation and the success of a business, it is important to know how to pay yourself from your business.
Entrepreneurs are known to withdraw money from their profit or cash flow at will depending on the type of venture they engage in, the level of the business, and how much that is needed for their personal and regular expenses.
If you are a member of a Limited Liability Company, a partner in a partnership, or a sole owner of your small business, it will be great if you take time to think about how you make withdrawals for personal use from your business income.
These tips will guide you in determining how to pay yourself from your business
Entrepreneurs have a different approach to the way they compensate themselves for the efforts, money, and time put into their business. Some take a certain percentage or amount from their income that they term as salary while some others just take an owner’s draw. Any of this approach is alright.
Meaning Of Owner’s Draw
An owner’s draw is a situation where an owner of a business takes some money out of the business funds to meet personal needs. This is the approach commonly used among sole proprietors where they take money from the profits of the company or capital invested though it may also be a combination of the two.
When a draw is made on the profits of the company, it becomes taxable on the proprietor’s tax returns and estimated tax payment must be made also on self-employment taxes on draws.
This is a specified amount that an entrepreneur pays himself from the company. It may be a calculated percentage of just as the assumed amount a proprietor decides to give himself. This is usually deducted from the gross pay in the event of tax payment.
How Much Should a Business Owner Earn From The Business?
It is expected that all entrepreneurs pay self-employment taxes and income taxes no matter the compensation method that is being used. The amount that you will pay yourself should be guided by how much the business requires to progress. You need to properly structure your venture before considering how it pays you.
There are several ways to structure a company but the best way to structure your business is by having a good knowledge and understanding of the difference between C corporations and pass-through entities.
The C corporation is subject to double taxation. It pays tax on the profit of the company and retains the after-tax which can be put back into the business for more results except they decide to pay a dividend to their shareholders. Where a dividend is paid, it is included in some other avenues of income on the shareholder’s tax return.
Pass-through entities: S.corporations, partnership, and the sole proprietorship are referred to as pass-through entities. The owners bear the losses incurred and profits generated by the business.
For instance, where you get $20,000 as your share from the company’s profit, the enterprise will file a tax return and give you a Schedule K-1 that indicates the $20,000 you received. The $20,000 is added along with your other income on your tax return.
The partnership tax return documents state the partners, percentage owned by each partner, and the profit.
How Much To Get From My Business As a Sole Proprietor
As an entrepreneur who solely owns and runs a business venture, it is good that you understand the factors that can help to increase your equity and also factors that will reduce your equity balance.
The equity of a sole proprietor is increased by contributions and profits generated by the company while the equity is reduced by the number of draws made and the losses incurred by the company.
A proprietor is expected to pay tax on profits made by the business notwithstanding the amount made as draws. For example, if Lizzy is the sole owner of Riverside Beauty and she puts in $100,000 at the start of the business and by the end of the year, the business generated a total profit of $40,000 making the total equity $140,000.
Lizzy may choose to make a draw from the balance which will reduce the equity of the business but tax must be paid on the $40,000 that was generated notwithstanding how much she takes from the business.
Getting Paid From The Business In Partnership
Just as the capital contributions made and profits increase the equity of the sole proprietor business, so also it does in the partnership venture while the draw of partners and losses made by the company reduces the equity.
Normally a partner does not earn a salary through a guaranteed amount that comes in the form of salary can be given to a committed partner for the services rendered. This guaranteed figure reduces the profits of the organization.
A partner may decide to make a further withdrawal from the percentage of profits he gets from the business
There are different methods on how to pay yourself from your business in a limited liability because the law guiding each state differs from another.
How much you can take out of the business is determined on some factors such as the amount that is being taxed and the agreement of the members of the company
A shareholder can get paid in form of dividends that are being shared out of the profits of the organization. A shareholder pays tax on the dividend received.
The Right Method To Pay Yourself From Your Business.
The amount to take out of your business should be dependent on the following factors
Business funding: This is the running costs of the venture. The amount that is required daily for the smooth operation of the organization.
Tax liability: this must be put into consideration because no matter how much you need for your expenses, the tax that is due must be paid. So if you want to remain in business, you must ensure that the essential payments expected of businesses by the regulations are paid and still have enough to keep the business running.
Although a business owner must think of how to pay yourself from your business, you must be careful of taking out a large percentage of the equity that can affect the growth of the business.