Business Plan question on owner equity


0

This is my first business so excuse me. I'm establishing a salary for myself as an employee but suppose I wanted a percentage of sold goods also. Should that be included in the budget against sales or is that something I don't need to worry about as part of my owner equity. In other words how I can increase my income so that I can become the primary funding source of my company as it grows?

Thanks

Legal Business Plan Salary Commission

asked Jun 1 '12 at 01:09
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Chieftec
10 points
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  • Are you incorporated? Are you running an LLC, or a Corp? What schedule are you filing taxes under, and what country is this in? – Madd Hacker 10 years ago
  • Corp. Quarterly, US. – Chieftec 10 years ago

1 Answer


1

So assuming this is a Schedule C corp (as opposed to a schedule S) any monies you draw out of the corporation will be taxable as income (some basics are here ).

If it was me, I wouldn't draw as large of a salary, instead, I would budget a percentage of sales to reinvest in the company. The reason I would do this is that you avoid extra taxes, and should be able to keep the company growing.

For example, if you had $100,000 in turnover in 2012, with expenses of $50,000, and drew a salary of $30,000, your profit would be $20,000 for the business, which is taxable at the rate (not sure the current rate, but for the sake of the example, let's use 20% for business taxes, and 25% for personal taxes).

If you keep the money in the business, you are taxed 20% of the $20,000 you made, or $4,000. On your personal draw, you are taxed 25%, with an obligation of $7,500.

Now if you draw monies out as dividends (profits distributed to shareholders) you have to pay taxes on the monies for the corporation, and you are taxed when you pull these monies out. This means you can only offer a dividend of up to the $16,000 you made after taxes and expenses, but then you are taxed your 25% on that as well (another $4,000). Let's not forget the sliding scale of taxes in the US, so that 25% could easily be 30% on that money. Now you fund or push that money back into the business, and you can only offer the business $12,000 (the amount of your dividend less tax).

Keeping the monies in the business and letting it self fund is typically better when using a C corp. S corp has slightly different rules, and ultimately a good accountant can provide the best advice.

Hope this helps, please let me know if it's not clear, or if you have further questions.

answered Jun 1 '12 at 02:09
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Madd Hacker
493 points
  • Thank you for the time you took to clarify. – Chieftec 10 years ago

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