Once that first good year of sales hits, you may be tempted to pull money out of your company; however, this is not always a wise idea. Understanding the difference between a distribution and a salary, the detriments of early withdrawals, and when it may be time to take money out are key characteristics to properly time your distributions.
Distributions vs Salary
Sole Proprietorships, Partnerships, and Corporations all have different methods for pulling funds out of the business. Sole Proprietorships have greater ease withdrawing funds because they are the sole owner while Partnerships and Corporations generally have to follow an agreed upon set of rules. A distribution is withdrawing money from the company that is not taxable while a salary gets paid like any other job with payroll taxes withheld and taxable income on your individual return. Paying yourself a small salary for the work performed in the business can be a great way to get needed cash but still enjoy added tax benefits.
What are the Detriments of Pulling too Much Money Out?
Pulling too much money out of your business can be one of the worst things you can do for your small business. When you start out a business, you most likely are running your business on a smaller scale than you would like. Business growth takes capital, new equipment, added revenue streams, and innovative strategies. Pulling out all profit from your business takes away from the tasks needed to properly grow. By reinvesting profits back into your business for the first few years, you will be able to pull more money out down the road as your business maintains market share.
When is it Time to Finally Pull Money Out?
Determining the right time to finally pull the hard-earned money out of your business is critical to refrain from halting business growth. Your business should have enough funds in the checking account to cover at least 6 months of operating expenses before the money is pulled out. Additionally, efficient equipment and enough employees should be found throughout the company. If these factors aren’t true for your situation, it’s not time to pull money out and you should consider paying yourself a small salary or take minimal, timed distributions.
The time frame business owners need to wait to pull funds out will vary, making it important to contact an expert that can work with you on your specific situation. Tax Geaks has the knowledge and experience to analyze your current financial situation, advising you on when it may be time to withdraw funds. Reach out to a team member today for more information.