When you work for someone else, payday is pretty straightforward; salary or wages, net of taxes withheld, paid on a pre-determined schedule. Suffice to say the best and most advantageous way of taking income from your business involves a good deal more than simply writing yourself a pay cheque.
"One of the most common mistakes many business owners make is not creating the right business structure from the outset," Not knowing what steps to take to establish the most advantageous structure, be it sole proprietorship, partnership or incorporated company, results in many owners continually denying themselves the most tax effective way to remunerate themselves. Ultimately, it means they net a smaller slice of every dollar they take out of their companies.
The process for deciding on the right structure, which, in turn, helps determine remuneration options, is driven largely by considerations and objectives that should be set out in an owner's business plan coupled with input and guidance from professional legal and accounting advisors. An underlying element of this process is the need, particularly for new owners, to migrate from the mindset of 'pay yourself first' to 'pay yourself smartly'. While each owner's circumstances are different, a common thread to all owners is the need to be informed and smart about remuneration. Getting the right structure and the best advice at the birth of an enterprise yields that far outweigh the relatively small costs involved.
But, being smart can also be complex. For example, an owner that takes remuneration primarily through dividend payments may attract a lower personal tax rate, but the absence of salary payments means tax contributions cannot be accommodated. Depending on the amount of dividends received, the savings from a lower tax rate may be less than those from income against which RRSP and tax contributions can be made.
As well, unless a company withholds tax when allowable dividend payments are made. "Unexpected tax bills at filing can take a big bite out of personal and business cash flow." There are numerous methods for maximizing net remuneration to owners but each calls for some careful guidance.
The way in which owners reimburse company expenses paid personally is also a potential remuneration sand trap. If an owner personally pays for business dinners or other legitimate business expenses, these amounts - substantiated by receipts - should be reimbursed directly to the owner. All too often an owner who has lost or misplaced receipts will take an additional and unspecified draw from the company as a way of offsetting any expenses paid personally. The result is that the company does not get to claim the actual expenses and the owner is left having to report even more income.
Most owners, no matter how focused they are on their business, do themselves a disservice by getting inadequate or poor advise right from the outset - and they suffer for it. Under an incorporated structure an owner can receive payments through various vehicles, including preferred shares, which, unlike common shares, have no profit requirements or payment frequency limits.
As well, an incorporated structure allows an owner to establish, and the company to fund, a family trust that can be used to cover education and health costs for an owner and his or her family. Payments to family members under rules of attribution are also allowed under this structure. Anyone who has ever undergone a revenue audit is likely aware that payments, outside an incorporated structure, to family members can be a huge red flag. Tax authorities often require full job descriptions, detailed individual qualifications of the family member engaged and complete records of utilization as a means of determining whether such expenses will be allowed.
The good news is that there are ways for business owners to maximize their remuneration without suffering the impact of heavy taxation and all business owners, particularly those just starting out, would benefit from seeking professional input. It could easily make the difference between keeping a lot or a little out of every dollar generated.
"One of the most common mistakes many business owners make is not creating the right business structure from the outset," Not knowing what steps to take to establish the most advantageous structure, be it sole proprietorship, partnership or incorporated company, results in many owners continually denying themselves the most tax effective way to remunerate themselves. Ultimately, it means they net a smaller slice of every dollar they take out of their companies.
The process for deciding on the right structure, which, in turn, helps determine remuneration options, is driven largely by considerations and objectives that should be set out in an owner's business plan coupled with input and guidance from professional legal and accounting advisors. An underlying element of this process is the need, particularly for new owners, to migrate from the mindset of 'pay yourself first' to 'pay yourself smartly'. While each owner's circumstances are different, a common thread to all owners is the need to be informed and smart about remuneration. Getting the right structure and the best advice at the birth of an enterprise yields that far outweigh the relatively small costs involved.
But, being smart can also be complex. For example, an owner that takes remuneration primarily through dividend payments may attract a lower personal tax rate, but the absence of salary payments means tax contributions cannot be accommodated. Depending on the amount of dividends received, the savings from a lower tax rate may be less than those from income against which RRSP and tax contributions can be made.
As well, unless a company withholds tax when allowable dividend payments are made. "Unexpected tax bills at filing can take a big bite out of personal and business cash flow." There are numerous methods for maximizing net remuneration to owners but each calls for some careful guidance.
The way in which owners reimburse company expenses paid personally is also a potential remuneration sand trap. If an owner personally pays for business dinners or other legitimate business expenses, these amounts - substantiated by receipts - should be reimbursed directly to the owner. All too often an owner who has lost or misplaced receipts will take an additional and unspecified draw from the company as a way of offsetting any expenses paid personally. The result is that the company does not get to claim the actual expenses and the owner is left having to report even more income.
Most owners, no matter how focused they are on their business, do themselves a disservice by getting inadequate or poor advise right from the outset - and they suffer for it. Under an incorporated structure an owner can receive payments through various vehicles, including preferred shares, which, unlike common shares, have no profit requirements or payment frequency limits.
As well, an incorporated structure allows an owner to establish, and the company to fund, a family trust that can be used to cover education and health costs for an owner and his or her family. Payments to family members under rules of attribution are also allowed under this structure. Anyone who has ever undergone a revenue audit is likely aware that payments, outside an incorporated structure, to family members can be a huge red flag. Tax authorities often require full job descriptions, detailed individual qualifications of the family member engaged and complete records of utilization as a means of determining whether such expenses will be allowed.
The good news is that there are ways for business owners to maximize their remuneration without suffering the impact of heavy taxation and all business owners, particularly those just starting out, would benefit from seeking professional input. It could easily make the difference between keeping a lot or a little out of every dollar generated.
After years of running and working several business Incorporated and not we have the plan and getting paid.
Check out our latest venture - Morning Coffee Shop's website, Morningcoffeeshop.com.
Article Source: http://EzineArticles.com/?expert=Paul_Scobie
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