One of the most common questions that shareholders and entrepreneurs ask their accountant says Edmonton but keeping. Is what is better to take out of their corporation, salary or dividends?
The answer to this question is not very clear-cut, because it is going to depend greatly not only on the business itself. And how much profit it is earning.
But also, because the shareholders personal circumstances are also going to be a part of the equation. Including how much money they need to take out of their corporation. And how soon they need to take that money in order to survive.
Some shareholders are going to need to start drying shareholders draw out of the corporation as soon as they open the doors to their business. because they are either the breadwinner in the family. Or the sole income earner. And that they have family members and bills that require them to bring money home every month.
Other shareholders on the other hand have a lot of savings built up, or have other family members bringing home more money. Or, perhaps they even have another job, that’s allowing them
to earn an income. And they don’t require earning income from their business in order to survive.
Therefore because the personal circumstances of each shareholder is so different. As is their business. Edmonton bookkeeping says that this isn’t an easy question to answer. And it requires delving quite deeply into the corporation finances. And understanding each shareholders personal circumstances very clearly.
The differences between salary and dividends are huge however. And by understanding the difference between the two says Edmonton bookkeeping. People can gain an understanding of why the answer to this question is typically a mixture of two of them.
Salary is taxable income that a business owner can take out of their business. And because it’s taxable, it will have the usual taxes taken off of the paycheck including income tax, CPP and EI. The average Canadian pays 43% of their entire wage in taxes. And this is one of the reasons why people are driven to become entrepreneurs.
They will be able to enjoy a lower tax rate, that will allow them to earn more money. Or save more money for their future says Edmonton bookkeeping. salary is also considered a expense of the business. And if an entrepreneur takes a lot of salary out of their business. It will make their business look less profitable on their balance sheet.
Dividends on and says Edmonton bookkeeping are not taxable, until the entrepreneur takes them out of their corporation. But they can only be earned on the profits of the corporation. So if the business isn’t earning any profits. I share holder cannot take dividends out of the business.
Since this might change from year to year says Edmonton bookkeeping, as well as the entrepreneurs personal circumstances. The accountants that they hire must always be keeping an eye not only on the circumstances of the business. But how the shareholders personal circumstances are doing as well.
By understanding all of these Dynamics. Their accountant can ensure that they’re taking the best mix of the two, that allows them to earn the money that they need to Live. While paying the least amount of taxes that they possibly can.
Edmonton Bookkeeping | Which is Better – Salary or Dividends
The question if entrepreneurs should take a salary or dividends out of their corporation is a difficult one to answer says Edmonton bookkeeping. Ultimately, because it is so complex.
A shareholder needs to ensure that their business is doing well off financially to take money out of the business. And how much money they need will only be based on their personal circumstances. Therefore, it’s not an easy question to answer. But when they hire the right accountant.
They will be able to research into their business finances and personal circumstances deep enough to answer that question. in order for an accountant’s to understand the circumstances of the shareholder well enough.
They will ask them to complete a balance sheet and income statement on their personal finances. This will help the accountant to figure out what the shareholders personal net worth is, so that they will know how much money they need to take out of their corporation.
The personal balance sheet says Edmonton bookkeeping will list the assets first followed by the liabilities. All of the shareholders liabilities should be included here, including the house that they own, any Vehicles they own, any rrsps they might have as well as tax free saving accounts to name a few.
The liabilities, will include things such as their mortgage, their credit card or tax debt, any outstanding balance on their line of credit, or even car payments. Edmonton bookkeeping says that this is going to show the accountant what resources a shareholder will have at their disposal. And what’s they will be able to take out of their personal life and put into their business if necessary.
The personal income statement on the other hand will show all of the expenses that a shareholder has every single month. Edmonton bookkeeping says first they will see the fixed expenses that a shareholder must pay every single month, and that the bill is typically going to be approximately the same. This might be their mortgage payment, a car payment, the utilities that they have to pay, and phone and internet for example. These must be paid, and typically going to be static from month to month.
The variable expenses on the other hand, are expenses that are not necessarily build. And not necessarily things that can be cut such as groceries. But these are all of the expenses that a shareholder has that are not necessarily written in stone so to speak. It can include things such as their entertainment budget, meals budget. And it might includes things such as gym membership, clothing allowance And toiletries.
This exercise can be incredibly beneficial for shareholders to go through says Edmonton bookkeeping. Because it generally will show them what they truly need to survive, and what do they can cut out and not need or not miss.
This will allow the accountants to figure out exactly what a shareholder needs every month in order to live. And if they can take that out of their savings for certain Amount of time. Or if they need to start taking money out of their corporation right away.