There are all sorts of ways to take money out of your business. But which one is the most tax-efficient? And how can you make sure that you're taking the least amount possible in taxes? Don't worry, and we're here to help! In this post, we'll break down all the different ways to take money out of your business, and we'll show you how to do it in a way that minimizes your taxes. Continue reading to learn how to extract cash from your business efficiently! There are a few different ways to take money out of your business: you can
- Issue dividends
- Make distributions,
- Or sell shares.
We will look at each method in more detail below.
Issuing Dividends
One way to take money out of your business is to issue dividends. With this method, you take profits and declare them as dividends. The following reasons make this a great way to get money out of your business:
- Dividends let you bring money out while still "owning" it- they're not the same thing as cash
- You don't have to sell any shares and
- You don't have to pay capital gains.
However, there are a few downsides to this method as well. As a dividend payer, you will have to pay tax on those dividends, and if you own the company issuing the dividend, you will be taxed on those dividends again. In addition, those types of dividends can't be used to pay yourself, so you can't fund payroll with dividends.Not to worry- there are ways around all these issues! With a little creative planning, you'll have funds coming out of your business without triggering taxes at every step along the way.
Making Distributions
Another way to extract cash from your business is by making distributions. With this method, you take profits and declare them as distributions (rather than dividends). This method has several advantages over dividends:
- You may be able to use distributions to fund payroll;
- Distributions aren't taxed at the corporate level; and
- The tax rate on dividends is generally higher than that on distributions.
However, there are a few things you need to watch out for. First, if you're making distributions to fund payroll, you'll need to be sure that you have enough profits left over afterwards to pay taxes; for this, you might have to consult a tax accountant. Second, if you're making distributions to shareholders, they'll be taxed on those distributions. If they sell their shares and take cash, you'll want the tax rate of the distribution to be cheaper than what they would pay if they sold. Otherwise, it's a waste of money. But wait, there's a solution for this problem too! We call it a "profit sweep," and it means making distributions in such a way that you make sure there's always enough money in the company after paying taxes to cover future distributions.
Selling Shares
The final way to take money out of your business is by selling shares. With this method, you sell a portion of your company to another party in exchange for cash. Getting the funds you need can be easy and fast using this method, and it doesn't have any of the disadvantages of the other methods we've talked about. However, it's also the most complicated and expensive of all three options. Capital gains tax will be due on those shares (which is different from ordinary income tax), and you should be prepared for an audit and a lot of paperwork. You can get advisory services to get some extra help. Of course, there are ways around all these issues with careful planning! Creating a private placement memorandum (PPM) and selling shares to accredited investors is the easiest method. This will help you avoid most red tape, but it will also limit the number of people who can invest in your company. When selling shares, there are other things to consider, such as determining valuations and choosing the right investor. Don't make this decision without doing your research!
Conclusion
In short, there are several ways to take money out of your business while being tax efficient. It's just a matter of knowing the pros and cons of each method and planning accordingly! Now which method would be most effective for you? That depends on various factors, including your business structure, the amount of money you're looking to take out, and your reasons for taking money out in the first place. Feel free to contact us for more details we will be happy to assist you.