As the owner of a thriving small business, financial decisions are a regular part of your day. Deciding how much to charge, setting up a schedule to pay bills and keeping an eye on cash flow are all part and parcel of a founder's responsibilities. However, at some point, it will be time to expand your small-business investments and make important decisions regarding whether to invest profits back into the business or personally reap the rewards by giving yourself and your staff bonuses. When facing this decision, the following are a few key points to keep in mind:
Should I Expand My Small Business?
Investing profits back into a business makes sense for companies in the growth and expansion phase. An expansion may mean opening additional locations or expanding and renovating current locations, hiring more staff for current or new locations or launching new product lines and services. Before you put profits back into the business, think hard about how and why you are doing so. If the economic benefit of expansion doesn't outweigh the cost, it may be better to consider other small-business investments or give yourself a bonus.
How Much of a Bonus Should I Give Myself?
Small-business owners who decide to take a bonus need to calculate the amount to ensure it doesn't harm the business. One option, Entrepreneur explains, is to choose a figure that is relative to the business's growth during the year. For instance, if your business grew by 10 percent last year, you could take a bonus equal to 10 percent of your salary.
Legal Requirements and Small-Business Profits
Profits paid out as bonuses may affect the business and the owner's tax situation. The business's legal structure may also affect a business owner's ability to pay a bonus.
If you are a sole proprietor or operate an S corporation or partnership, paying yourself a bonus is easy, because business profits and your personal income receive the same tax treatment from the Internal Revenue Service (IRS). However, if your business is set up as a corporation, any profits are payable to the corporation, not you personally. When a small corporation has sizable profits, it may seem like a good idea to reward yourself with a sizable bonus. However, be careful. The IRS may view this as overcompensation to reduce the corporation's tax liability and disallow the bonus, according to the Yale Law Journal.
For more information on the legal requirements of paying yourself when you run your own business, refer to the IRS guidelines regarding payment and taxes for business owners and consider talking to an accountant and/or business financial advisor.
Determining the best options for small-business investments and the use of your business profits depends on your personal and professional goals and financial situation. Review your financial statements, consider consulting an accountant, advisor or lawyer and think carefully about your future plans for your business.
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