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Business owners need to be very mindful of the fact that running out of cash in business is one of the most significant reasons why businesses fail in Canada says part-time CFO. 50% of all entrepreneurs run out of business in five years, and 29% of entrepreneurs that fail say that the reason why this is because they ran out of money in their business. Since this is such a common business problem, entrepreneurs who are able to increase the cash flow in their business, can significantly impact avoiding running out of it as a way of failing in business.
When way that business owners can increase the cash flow in their business by using tax strategies, is simply by checking with part-time CFO on how they should take money out of their corporation, either in salary or dividends. The reason why this can increase cash flow, is because ultimately this question boils down to a matter of taxes. The reason why business owners will take salary or dividends out, is based on tax reasons.
The difference between salary and dividends is this, since dividends are not deductible from the income of the business, they end up being and direct withdrawal of the prophets of the Corporation so they donít show up on the income statements of the business. Dividends are taxed at the corporate tax rate 11%, and so thatís significant reason for businesses to draw dividends. Salary is deductible from the income of corporation, and it will show up on the income statements of the business. The top of the personal tax rate in Alberta is currently 48%, so all salary that is taken out of the business gets taxed at a higher rate. Many entrepreneurs think that since dividends are taxed at a lower rate, that they should always deduct their income from dividends. However, is not necessarily that simple because business owners need to make a certain amount of salary in order to avoid having to pay back taxes to CRA at the end of the year for nonpayment of income tax. Also, if an entrepreneur has child care expenses, they can only claim childcare expenses and deduct them off of earned income which is salary. Also moving expenses for the business also can only be deducted from earned income. So if an entrepreneur wants to claim anything that require salary, they should take some salary, in order to pay income tax and avoid having to pay CRA at the end of the year, but also so that they can make certain claims says part time CFO.
Another reason why business owners need to be very cognizant of the tax strategies involved in how to take their income of their business, is because an inefficient strategy impacts not only business owner their family in additional taxes. Many entrepreneurs who try to save some money hiring a less expensive accountant, usually ends up paying far more in additional taxes than they would if they had hired a great accountant from the beginning says part-time CFO.
Itís extremely important that entrepreneurs consider the question how should they take money out of their business, salary or dividends says part-time CFO. The reason this is important, is because the difference between taking salary or dividends out of their business, boils down to a answer about how to efficiently utilize taxes. Since the decision on how to take money out of their business is in taxes strategy, business owners need to be sure that they are getting the right part time CFO to help with that in order to do so efficiently. Business owners who hired inefficient help with this, end up paying far more cost taxes than they would paying for a great accountant from the beginning.
If business owners are able to save thousands of dollars per year in saves taxes, that should be able to help them increase the cash flow in their business. Since half of all entrepreneurs close their business within five years, 29% of those entrepreneurs say the reason why they failed in business is because they ran out of money. If business owners can increase the cash flow in their business, they should be able to avoid running out of money, which can help them succeed in business for 29% of failed entrepreneurs were not able to. Part-time CFO says that this is an extremely important strategy for businesses.
Many business owners may want to find out if their current services are effective or not. When way that they can check says part time CFO, is by looking at their previous tax return, or their current financial statement and looking at the dividends or salary. If it shows that they are paying either hundred percent in either, that could be an indication that not enough thought process went into this decision. Since this is one of the most asked questions to part-time CFO, itís a question that many people have, and thereís not a simple answer to. If anyone thinks that they have the answer simply, or it can explain easily, they probably arenít understanding the situation that well.
Some variables that part-time CFO needs to take into consideration when coming to their answer, is if an entrepreneur is any other income unrelated to their business, how did they take that money, is it salary or dividends? Does the business owner have a spouse, they take money out of the corporation as well, how? Do they have any other unrelated income? They take that, salary or dividends? The reason why these questions are extremely important is because it affects income splitting, the overall taxes being paid by the household, even CPP applications, if the business owners paying salary they also must pay CPP if they are paying dividends then they donít. These are just a sampling of the questions that business owners need to help their entrepreneur understand in order to come to the right conclusion.
