How to fund your business and how to take money out of your business are decisions you will be faced with as an entrepreneur.
Taking financial leadership around these two issues will set you apart from the entrepreneurial rat race. Here are some key insights that might help you make the right financial decisions for your business.
In this blog I would like to discuss how to take money out of your profitable business.
Taking money out of your company
You have made a healthy profit! Congratulations!
Now the question begs: Do I pay the owners bigger salaries, or do I declare dividends?
The answer lies in the tax implications. Let me break it down for you with this example:
Dividends are currently taxed at 15% of after tax profit.
Here’s a simple example to illustrate the actual cost:
A company makes R100 profit. It pays R28 in companies’ tax (28% companies’ tax rate) and is left with R72 in after tax profit. On this, 15% dividends tax is charged (R72 x 15% = R10,80), leaving the owner with R61,20. The total tax paid on the R100 profit is R38,80, an effective tax rate of 38,8%.
The tax rate on salaries is based on the bracket that the receiver falls in. The only tax bracket in which salaries are taxed higher than the above combination of companies and dividends tax (38,8%), is the highest one of 40%. To reach this bracket, you would have to earn R673,101 annually (R56,092 per month).
It is cheaper for tax purposes to increase owner salaries up to a point where they earn R56,092 per month or more, than it is to pay out after tax profit as dividends.
I hope you have found these insights useful!
If you want to know more, Outsourced CFO is currently hosting a series of FREE workshops on Leadership in Financial Decision Making. Have a look at http://youtu.be/6dIzmMQPt4E for more info.