When you have a business, one of the key moments is when you decide to withdraw money from it, whether to reward your efforts and those of your partners or to use those funds in other personal projects. At this point, there are different ways to do it without complications, what are the most common strategies, their benefits and what should you take into account:
If you are a professional who provides services to your business, one option is to increase your professional fees for the work you do in the company. This is quite straightforward: if you work more or provide more value, you could receive an increase in your job compensation. This is good because it reduces the amount of taxes the company has to pay. However, it is important that everything is well documented and that payments are properly justified to avoid tax issues. In addition, this extra money will increase your annual income, which means that you could end up paying more on your personal income tax return.
Another way is to assign yourself a salary as an administrator if the company’s bylaws allow it. This can also be deductible for the company, which helps reduce taxes. But, as in the previous case, it will increase your personal income and, therefore, what you must pay for income tax. A detail to consider is that these salaries come with a significant withholding, but this is adjusted in your annual tax return, which could result in a refund if the withholdings exceeded what you actually owed.
Distributing dividends is another route. Although at first glance it seems costly because of the double taxation it implies (first the company pays for its profits and then you pay for the dividends received), it has its advantages. It does not negatively affect the company’s balance sheet, and although it reduces liquidity, it can improve the perception of the company’s financial health. At a personal level, the tax impact may seem lower because you feel the effect indirectly, although in the end, the combined tax burden can be high.
Finally, more options could be considered, for example, if the partners are also owners of the premises that the company uses or of equipment that could be rented to the company. Adjusting the rent can be a way to withdraw funds. This must be done carefully, ensuring that the rent is in line with market prices to avoid tax issues. Although this method offers flexibility, changing the rent is not something that can be done overnight and has tax implications mainly due to VAT.
In summary, withdrawing money from your business is a process that requires planning and knowledge of tax implications. Each option has its advantages and disadvantages, so it is important to evaluate which method best suits your needs and those of the company. With a smart strategy, you can benefit from the fruits of your business efficiently and responsibly.
