Taking Money Out of Your BusinessJan 26, 2024
In a recent episode of Keep What You Earn, Shannon delved into the topic of taking money out of your business. She brought to light the common misconception that taking money out of a business can lead to increased tax obligations. In this insightful episode, she provided a detailed breakdown of how different entity types can withdraw funds from their businesses and the tax implications associated with each method.
For many entrepreneurs, understanding the nuances of taking money out of their businesses can be daunting. Shannon started by dissecting the different entity types and their respective approaches to taking money out. For sole proprietors and single-member LLC owners, the process is relatively straightforward. They can take owner's draws by transferring money from their business checking accounts to their personal accounts. Shannon emphasized the importance of maintaining a healthy cash flow in the business and advised entrepreneurs to ensure that they have enough funds in their business accounts to cover operating expenses and taxes.
One critical aspect that Shannon highlighted was the tax implications of withdrawing money from a business. She made it clear that as a single member LLC or sole proprietor, the act of taking money out, whether as an owner's draw or via any other method, does not trigger additional taxes. Entrepreneurs in these categories are taxed on the profits of their businesses, regardless of where the money is located. It is crucial for business owners to set aside funds for taxes when they take money out, to avoid finding themselves in a tax predicament down the line.
The discussion then expanded to S Corporations. Shannon advised that S Corporation owners could take money out through payroll or as owner's draws. Paying oneself through payroll allows the IRS to withhold taxes, which can be advantageous in meeting tax obligations. She emphasized the importance of determining a reasonable salary and detailed her own approach to balancing regular salary payments and additional draws from her S Corporation.
Partnerships, another common business entity, have their own set of rules for taking money out. Shannon explained that while partners can take distributions, it is essential to do so in a manner that aligns with their ownership percentages to ensure fair treatment and tax obligations. Additionally, she discussed the concept of guaranteed payments, which are akin to a salary, allowing partners to receive compensation based on their contributions to the business.
The episode also touched on C Corporations, where the process of taking money out differs due to potential double taxation. Shannon highlighted the importance for C Corporation owners to carefully consider how they extract funds from the business, emphasizing that owner's draws may not be the most advantageous method due to the potential tax implications. She provided valuable insights into navigating the complexities of taking money out of a C Corporation and stressed the need for careful consideration and professional advice.
Throughout the episode, Shannon's expertise shone through as she demystified the often complex topic of taking money out of a business. Her practical advice and real-world examples provided valuable guidance to entrepreneurs at various stages of business ownership. For those contemplating the best approach to extracting funds from their businesses, this episode served as a comprehensive and invaluable resource.
In conclusion, the episode underscored the importance of understanding the nuances associated with taking money out of a business. Whether it's managing taxes, ensuring fair treatment in partnerships, or navigating the unique challenges of different entity types, Shannon's expertise and guidance provided actionable insights for entrepreneurs seeking clarity on this critical aspect of business finance.
If you’re an entrepreneur looking to gain more knowledge about how to navigate financial decisions in your business and grow your wealth, Keep What You Earn is your go-to podcast. Shannon Weinstein’s comprehensive and relatable approach will leave you feeling empowered and confident in managing your business finances. Don't miss out on the wealth of knowledge shared on this enlightening podcast!
What you'll hear in this episode:
03:34 IRS taxes all income, plan withdrawals wisely.
07:47 Determining reasonable salary for entrepreneurs is ambiguous.
12:50 Consider unequal distributions and guaranteed payments in partnerships.
14:15 Trainer seeks extra payment for unequal business work.
17:20 C corporation tax implications and payment considerations.
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.