A few weeks ago, we talked about how to pay yourself as an entrepreneur and business owner. But you might still be asking yourself “how do I take cash out of my business?”
If you are finding yourself needing to take other money out of your business, there are some things you will need to keep in mind. Your business structure will play a role in how you are able to get the funds.
Sole Proprietorship
As a sole proprietor, you will simply transfer the money out of your business bank account and into your personal account or cut yourself a check. We want to emphasize the importance of keeping your business expenses and personal expenses separate. The IRS does not like the mixing of accounts and makes it a lot more likely that you will run into issues down the road.
Partnership
When getting money out of a partnership, you can go one of two routes: guaranteed payments or partner draws. With guaranteed payments, the money can be drafted directly from the business bank account into the partner’s personal bank account. This is a way of compensating each partner for their work done in the partnership.
After all of the business expenses and guaranteed payments are made, any remaining profits can be distributed as a partner draw. Keep in mind that you don’t have to take a partner draw. You are allowed to keep profits in the business.
C Corporation
If your business is structured as a C Corp, you can take cash out of your business as a partial salary/partial dividend payment. Known as the 60/40 rule, 60% of the payment should be through payroll as a salary and the other 40% as a dividend payout.
S Corp
An S Corp can have cash taken out through salary and distributions. Shareholders within an S Corp need to pay themselves a reasonable salary through payroll. After the salaries and business expenses are all paid, any remaining funds can be disbursed through distributions. The distributions must be paid on a pro-rata basis of ownership.
In conclusion
Before making any big decisions, we always recommend talking to a qualified tax professional – preferably one who knows your business already.
How do your books look? Do you have tax strategies in place for 2021 and 2022? Are you prepared for the upcoming tax law changes build into the new bills being passed? These are all things you need to be asking yourself as we begin closing out 2021.
If you are an online entrepreneur looking to get freedom from the accounting, tax, and regulatory aspects of your business, CPA On Fire can help. CPA On Fire has ample experience helping online entrepreneurs grow exponentially in their business. Let’s connect and we’ll show you how we can help you.