Business Owner Series: Part 4 of 9
Company profit extraction ideas
Chris Broome – Chartered Financial Planner
Profit extraction is a key area of tax planning for all business owners in order to know how business profits can be extracted efficiently.
It involves some complicated decisions, and the tax rules change regularly, so it is important to seek expert advice to find the most efficient combination for you.
Here are 9 ideas for you to consider:
1. Dividend payments: One of the simplest ways to extract profits from a business is by paying dividends to shareholders. This allows the business owner to take a portion of the profits without having to sell any shares of the company.
2. Salary and bonuses: Business owners can also extract profits by taking a salary or bonus from the company. This can be done as a regular payroll expense, and it is a way to extract profits without having to pay taxes on them.
3. Pension contributions: Corporate pension contributions provide two benefits.
(1) The owner is able to extract dividend free money from the company, paid into their own Personal Pension.
(2) The company makes this contribution from pre-tax profit, meaning it will reduce profit and therefore reduce your corporate tax liability.
4. Capital gains: If a business owner decides to sell their business, they can extract profits through capital gains. The profits made on the sale of the business are taxed at a lower rate than regular income, making it a favourable way to extract profits.
5. Stock buybacks: Another way to extract profits from a business is through stock buybacks. This allows the business owner to purchase shares of their own company, reducing the number of shares outstanding and increasing the value of the remaining shares.
6. Stock options: A business owner can also extract profits by issuing stock options to employees. This allows the business owner to reward employees while also reducing the number of shares outstanding and increasing the value of the remaining shares.
7. Royalties: If a business owner has created a product or service that generates recurring revenue, they can extract profits by licensing it to others and collecting royalties.
8. Renting assets: Business owners can extract profits by renting out assets such as equipment, office space, or vehicles. This can generate additional revenue for the business and help to extract profits without having to sell any shares of the company.
9. Partnerships: Business owners can extract profits by forming partnerships with other businesses. This can allow them to share in the profits of the partnership while also reducing the risk of running the business on their own.
Overall, there are many ways for business owners to extract profits from their companies. It’s important to consider the tax implications and long-term effects of each option before making a decision.
Please get in touch to discuss your business and the steps you can take to create long-term stability.
Next in the series – Part 5 of 9: How do you prepare your business for sale?
The next blog in the Business Owner Series looks at some of the steps to consider when preparing your business for a sale and to secure a successful outcome for both you and the buyer. You can read it here.