How To Take Money Out Of A Closely Held business In Four Ways
So you own a business and it is doing well. Let's say that you're doing "very" well and you've got a lot of money sitting around in your company bank accounts. Paying it all to yourself in salary will likely trigger massive tax consequences that you may wish to avoid. So what do you do?
First, it is important to point out that this article will be discussing incorporated businesses not sole proprietorships. So if you own a corporation, read on. If you own a sole proprietorship or a limited liability company then stop reading right now. Also, be sure to talk to your tax attorney or accountant before taking any action.
The first way to take money out of business is to sell the business, or at least sell part of the business. In corporations this is very easily done by simply selling shares. Taxes for the sale of capital assets are taxed at a maximum rate of 28%, which may be lower than your personal tax rate on ordinary income. This is not a very good way to take money out of your company for two reasons; first, you have to deal with new investors which is always a hassle and second, 28% isn't that much less then the highest tax bracket level which means you won't save a huge amount of money in taxes by doing this. You should check with your accountant to find out what the current tax rates are as they may have changed since this article was written.
The second way to take money out of a closely held business is to take a large salary and bonus. This money is deductible from the corporation's earnings and of course it is taxed as ordinary income to you like always. But this way doesn't really solve our problem of lowering your taxes, does it? And keep in mind that the IRS monitors excessive income levels. If they determine that your salary is much greater than other people in the same job within the same industry receive then they may disallow the corporate tax deduction for the income expense.
The third way to take money out of closely held business is to pay dividends. Of course, this will trigger double taxation as you will have to pay the dividends after you pay corporate income taxes and then you'll have to pay personal income taxes at the ordinary rate you usually would.
Finally, the fourth and final way to take money out of a closely held business is to take advantage of perks and employee benefits that are tax deductible to the corporation. These things include paying for business-related meals, use of company car, parking fees, convention hotel rooms etc. Keep in mind that the IRS routinely cracks down on what they feel to be excessive perks and benefits. Be sure to discuss closely with your accountant to make sure you stay within the rules and the IRS laws.
There you have it, four ways to take money out of a closely held business...
First, it is important to point out that this article will be discussing incorporated businesses not sole proprietorships. So if you own a corporation, read on. If you own a sole proprietorship or a limited liability company then stop reading right now. Also, be sure to talk to your tax attorney or accountant before taking any action.
The first way to take money out of business is to sell the business, or at least sell part of the business. In corporations this is very easily done by simply selling shares. Taxes for the sale of capital assets are taxed at a maximum rate of 28%, which may be lower than your personal tax rate on ordinary income. This is not a very good way to take money out of your company for two reasons; first, you have to deal with new investors which is always a hassle and second, 28% isn't that much less then the highest tax bracket level which means you won't save a huge amount of money in taxes by doing this. You should check with your accountant to find out what the current tax rates are as they may have changed since this article was written.
The second way to take money out of a closely held business is to take a large salary and bonus. This money is deductible from the corporation's earnings and of course it is taxed as ordinary income to you like always. But this way doesn't really solve our problem of lowering your taxes, does it? And keep in mind that the IRS monitors excessive income levels. If they determine that your salary is much greater than other people in the same job within the same industry receive then they may disallow the corporate tax deduction for the income expense.
The third way to take money out of closely held business is to pay dividends. Of course, this will trigger double taxation as you will have to pay the dividends after you pay corporate income taxes and then you'll have to pay personal income taxes at the ordinary rate you usually would.
Finally, the fourth and final way to take money out of a closely held business is to take advantage of perks and employee benefits that are tax deductible to the corporation. These things include paying for business-related meals, use of company car, parking fees, convention hotel rooms etc. Keep in mind that the IRS routinely cracks down on what they feel to be excessive perks and benefits. Be sure to discuss closely with your accountant to make sure you stay within the rules and the IRS laws.
There you have it, four ways to take money out of a closely held business...
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