The most compelling aspect of running your business is that you get to pay yourself as a business owner. Unlike a corporate business structure, you are not dependent on others to either run the show or pay you for your efforts.
This means that you have the flexibility to decide how much you earn as a business owner, how much effort you put in, and thus earn the rewards of the efforts made.
There are many advantages to running your own business. Still, the major contention you face is how to pay yourself as a business owner?
The way you pay yourself as a business owner depends upon the type of business structure you choose. You receive a draw if you are a sole proprietor. Likewise, you distribute profits or losses based on the percentage mentioned in your partnership agreement if you run a partnership firm.
In this article, we will discuss how to pay yourself as a director of a company.
If you’re looking to take money out of a Company a loan account can be used to record the amounts taken.
When you draw the money out of a company there are rules that you will need to comply with. These rules require that you draw up a loan agreement between you and the company.
Along with the loan agreement, interest will also be charged on the loan balance which will be taxable.
This type of arrangement would be inappropriate as a long term strategy and is best to avoid using.
2. Salary or Directors salary
This is a simple way of paying out money from your company. You essentially become an employee of your own company.
Paying a salary while simple, also requires that PAYE/UIF is paid on the gross figure. The salary that you draw monthly will then be taxable in your personal return as though after PAYE deductions (as though you are an employee of a company – just, your own!).
3 . Dividends
Dividends are payments that are made from the balance of profits in a company – Retained earnings. These profits aren't just from the current year - they are the profits from all years - which means if you have made losses in the past you then need to make profits that exceed the total of these in order to pay dividends.
How We Recommend Paying yourself from a company
The easiest way here is to pay a salary to the owners. If not paid in cash there's no problems at all - it will simply sit on the balance sheet as owing to the owner.
It is also important to regularly 'empty out' the retained earnings in a trading company through issuing a dividend.
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