How can I get money from my corporation?
This subject causes the worst confusion that I see in corporate bookkeeping. Especially if you’re just making the transition from solopreneur to corporation, it’s very hard to get past the old “my business is me so the business’s money is my money” way of thinking!
When you convert your business to a formal entity, it’s very important to grasp that you have a new relationship with your company. It’s a little like the company is your employee. There are laws that govern what you can do to your employees and there are laws that govern what you can do to your corporation.
Would you rifle through your employees’ wallets and take money out? No!
When you take money from your corporation you have to make sure you’re doing it correctly so that you don’t break the law or make yourself look shady. Beware! Tax law and corporate law are subject to change, and also vary by location. This article is NOT a substitute for consulting your CPA or lawyer! We’re bookkeepers, not tax or legal professionals, so when someone on the Bliss Team asks you about money you transferred to or from your corporation we’re just trying to make sure that we’re categorizing transactions correctly and that we know what to expect will happen with them.
Here’s a very basic list to help us understand the different ways of transferring money. The goal of this list is to get a grasp on the options before taking money out — so that we can think about which method might be best for our current needs and goals, and what sort of obligations we might be bringing on ourselves or the corporation by doing it this way. The secondary goal of this list is to get ready to discuss it with your attorney or CPA if you realize you may have already done something that you need to make right.
From a bookkeeper’s point of view, there are 5 legitimate ways you can get money from your company.
You can get money when it is:
- Repayment of a loan you made to the corporation.
- Funding a loan from the corporation to you.
- Dividends paid by the corporation to the stockholders.
- Payment for corporate stock which you are selling back.
- Payment as salary, wages, and/or bonuses.
(1) Repayment of a loan you made to the corporation.
When you make a loan to your corporation, make sure to have loan documents drawn up and signed by both yourself (the stockholder making the loan) and a corporate officer.
You are not taxed on loan repayments that you receive from the corporation. However, you should have reported interest earned, and the corporation should have taken an interest expense deduction.
(2) Funding a loan from the corporation to you.
If you want to receive a loan, make sure to have loan documents drawn up and signed by both yourself (the stockholder receiving the loan) and a corporate officer. The corporation will record periodic interest earned and you may be able to take interest paid as a tax deduction.
(3) Dividends paid by the corporation to the stockholders.
Dividends are profits split among the shareholders proportional to the number of shares each stockholder owns. For example, when a company has $100 to pay in dividends, and one stockholder owns 40% of the stock, she should receive 40% of the dividends (that’s $40).
See dividends for more information.
(4) Payment for corporate stock which you are selling back.
When you sell some of your stock in the corporation back to the company, the stock becomes Treasury Stock to the corporation (as opposed to Common Stock).
You (the shareholder who has sold the stock) will not be taxed on the sale if you receive the same amount per share as the amount per share for which you originally bought the stock.
(5) Payment as salary, wages, and/or bonuses.
Keep in mind that salary amounts are not dependent upon the number of shares you own.
For example, if you and your partner each own 50% of the outstanding stock and you’re each doing some of the work that keeps the business going, it is not necessary that you each get identical salaries. Maybe one of you gets a higher paycheck due to putting in significantly more hours. Or maybe you have an agreement that you will each be paid according to the market value of the skills that you’re using for the corporation, and one of you has much more marketable skills.
Your wages, salaries, and bonuses are treated as part of the normal payroll, so as an employee you pay taxes on your income, and the corporation has its payroll taxes.
And (6) Theft or embezzlement.
And that’s all.
There’s a bunch of other things that people think they can take out of a corporation, but they can’t. Partner “draws” are one of those things!
Reimbursements are not wages or money taken out, they are corporate expenses which were paid in advance by an individual agent of the corporation. So when you get a reimbursement you shouldn’t get taxed for it, and the corporation shouldn’t be giving you more in reimbursements than you spent. Your personal net profit from reimbursements should be zero.
(Please note: This article is only an introduction to these concepts, and does not create a reliance of any kind!)
These things can be hard to keep track of in your bookkeeping. That’s why we’re here to help. Contact Bliss Your Money today!