[daren]

Does it really matter what I call the money left over at the end of the day? Does it affect how I how I do business?

The way I see it, if I have paid my supplies, payroll, insurance, etc. and replenished the kitty then what is left over is mine no matter what name I give it. I'll pay taxes on every $ the same. It is good to tract job profits but separating my money into two piles when it all goes into the same pot to pay my bills just seems like wasted effort.

That's my point of view. What's yours?

 

[vermontpainter]

Does it really matter what I call the money left over at the end of the day? Does it affect how I how I do business?

The way I see it, if I have paid my supplies, payroll, insurance, etc. and replenished the kitty then what is left over is mine no matter what name I give it. I'll pay taxes on every $ the same. It is good to tract job profits but separating my money into two piles when it all goes into the same pot to pay my bills just seems like wasted effort.

That's my point of view. What's yours?

It depends on your business set up. If you are a sole proprietor and content with keeping whats left over, thats fine. If you are set up as a corporation you have opportunities that the individual doesnt. If you are in the first category, you are ignoring the financial literacy that would allow you to clearly identify the strengths and weaknesses of what your business is doing. Accurate financial statements are worth their weight in gold. Otherwise, you basically have a job, pay your bills and get taxed. Not that theres anything wrong with that.

 

[Dave Mac]

well if you take all the profit out of the company you have nothing to build your company or future with. If you do this I hope you have a vey good savings program for your personel retirement your adding to. Only you can decide whats good for you.

I think it all depends on what goals you are trying to achieve

 

[CApainter]

You must have missed that lesson during the post- “What’s wrong with all you guys”

Understanding the difference between salary and profit clearly defines if you’re operating a business or just pretending to own one. Keeping track of your profits, after you pay yourself a salary, is a way of measuring the health and expansion potential of the company. It helps with balancing the books during fluctuations.

 

[Brian]

Does it really matter what I call the money left over at the end of the day? Does it affect how I how I do business?

A rose by any other name is still a rose. Yes it matters.

Salary is what you get paid-- what you use to live on, personally invest and save, etc. Profit is what you use to grow your business. If there is no distinction--that is, if you treat both as salary--you will behave differently. You will spend/ save/ invest your salary on yourself personally, rather than the business.

No matter how our business is organized, personal and business finances should be kept seperate. This allows for more accurate financial statements, which are absolutely crucial to running a business. If you co-mingle the money, putting it all into one big pot, it can be very difficult to truly understand the financial position of your business.

Brian Phillips

 

[daren]

I do keep my business and personal finances separate. Each has a checking and savings account. I keep at least 1 month of business expenses and personal expenses in savings separate from each other to ride the ups and downs. That is why a said "replenish the kitty" in my first post.

I do like what Brian said about behaving differently because of how one perceives the money. This is the kind of thought I was looking for when I asked the question.

I wanted to know why some are so aggressive in defending the separation of salary and profit and having a job versus a business.

I do take some offense (but not much) when my small operation (me + 1 or 2) is viewed as a job. To me a job is a clock puncher. You clock in, make a few widgets, you clock out. That's a job. Yes I do the physical work but I also do everything else. Sales, paper work, marketing etc. Yes if I stop the business stops but it is still a business.

I am grateful to all people here for sharing so much information. Some of it I had already learned myself the hard way. Some was new and I understood it right away. Some I'm still trying to a get a grip on and this was one of them. I don't do anything in my business unless it will improve how I do it. So if I don't understand something that others see as very important to their business I am not going to adopt that practice until I understand why and how it is done. So I asked and shared how I see it. I don't mind being wrong. I am quite often. I just don't intend on staying wrong.

 

[Tonyg]

Does it really matter what I call the money left over at the end of the day? Does it affect how I how I do business?

Your business should (eventually) be able to pay you a set salary. The profit is anything that is over that salary. This can still be income to you, if you are not reinvesting it into your business, which means you are taking a salary and the profit. The salary should be what it would cost to replace you.

Consider this: If you are happy just to coming out in positive territory and are not making your "salary" then you essentially have a job - not a business. If at the end of the year you have made your predetermined salary and have made a few bucks more then you have grown into a business. If you reinvest those profits and continue to live off your salary - you have grown your business.

I would think that it would be every business owners goal to be able to step aside and watch their business continue. This is when you take your growing profits and pay someone else your "salary" to take your place.

 

[Brian]

I do keep my business and personal finances separate. Each has a checking and savings account. I keep at least 1 month of business expenses and personal expenses in savings separate from each other to ride the ups and downs. That is why a said "replenish the kitty" in my first post.

That's good, and it makes the acounting much easier.

I wanted to know why some are so aggressive in defending the separation of salary and profit and having a job versus a business.

I do take some offense (but not much) when my small operation (me + 1 or 2) is viewed as a job. To me a job is a clock puncher. You clock in, make a few widgets, you clock out. That's a job. Yes I do the physical work but I also do everything else. Sales, paper work, marketing etc. Yes if I stop the business stops but it is still a business.

I don't see it that way. I think people are just pointing out the difference because the difference between a job and a business is significant. A job is something that requires your daily involvement for it to continue and thrive. A business can operate with a long absence on your part. I think it's fairly safe to say that most of us here have a job, rather than a business. Myself included.

There is nothing wrong with having a job if that is what you want. If it's not what you want, the first step is acknowledging what you actually have.

I am grateful to all people here for sharing so much information. Some of it I had already learned myself the hard way. Some was new and I understood it right away. Some I'm still trying to a get a grip on and this was one of them. I don't do anything in my business unless it will improve how I do it. So if I don't understand something that others see as very important to their business I am not going to adopt that practice until I understand why and how it is done. So I asked and shared how I see it. I don't mind being wrong. I am quite often. I just don't intend on staying wrong.

That's a very good attitude and it will take you far.

Brian Phillips

 

[vermontpainter]

I wanted to know why some are so aggressive in defending the separation of salary and profit and having a job versus a business.

There are alot of reasons. The tax and legal advantages to incorporating and running a business are numerous. From a very practical standpoint, as your business grows, it becomes more important that it be a financial entity that is separate from your personal finances.

For instance, if you go into your local bank in January when things are slow to try to set up a line of credit for your business to compensate for poor cash flow, the first thing they ask for is 2 years of personal and business income taxes as well as company financials. If you arent able to produce these documents, in their eyes, there is no business entity. Your business has to show that it is credit worthy. If your company gas cards and credit card are in your personal name, it is not helping your business to establish a track record, and its grossly misrepresenting your personal spending. If you grow to the point where you want to buy or lease property to run your business out of, you need to be able to demonstrate on paper that you have a viable business. Its helpful to be able to show that you have healthy personal credit and finances and that your business is also strong. In the end, you still are pretty much the personal guarantor of what your business does.

When you are very first starting out, its easy to not care about these things because you just want to get busy. As you grow your business, these things become very important. No offense on the "job" comments, but there is a difference between having a business and being a business.

 

[MAK-Deco]

well if you take all the profit out of the company you have nothing to build your company or future with. If you do this I hope you have a vey good savings program for your personel retirement your adding to. Only you can decide whats good for you.

I think it all depends on what goals you are trying to achieve

Hey Dave,

Being a SoleP doesn't mean one can not set up retirement plans... I am sure there are plenty of one man shows who are incorp. that don't have any retirement as well.

 

[MAK-Deco]

There are alot of reasons. The tax and legal advantages to incorporating and running a business are numerous. From a very practical standpoint, as your business grows, it becomes more important that it be a financial entity that is separate from your personal finances.

For instance, if you go into your local bank in January when things are slow to try to set up a line of credit for your business to compensate for poor cash flow, the first thing they ask for is 2 years of personal and business income taxes as well as company financials. If you arent able to produce these documents, in their eyes, there is no business entity. Your business has to show that it is credit worthy. If your company gas cards and credit card are in your personal name, it is not helping your business to establish a track record, and its grossly misrepresenting your personal spending. If you grow to the point where you want to buy or lease property to run your business out of, you need to be able to demonstrate on paper that you have a viable business. Its helpful to be able to show that you have healthy personal credit and finances and that your business is also strong. In the end, you still are pretty much the personal guarantor of what your business does.

When you are very first starting out, its easy to not care about these things because you just want to get busy. As you grow your business, these things become very important. No offense on the "job" comments, but there is a difference between having a business and being a business.

If a person is a SoleP all he has to do is show his schedule C which will give the any creditor enough info to make a decision on credit worthiness.

Now if someone is claiming to work for themselves and does not file the correct info that is a different story. The IRS has given the means for a person to run a biz as a SoleP to be considered a legit biz.

 

[daArch]

I gotta agree with the distinction as Scott describes it.

Being an owner of a corp, you draw a salary and the corp makes a profit.

Being a soleP, you always are drawing a salary.


Basically, profit is the return on an investment. Yes, as a soleP you "invest" in equipment and with that equipment you earn money. BUT you are working to earn that money, that's a salary. Hopefully your salary increases each year.

With a Corp, it "invests" in you. The corp through your sweat equity pays you a salary and recoups its investment. After all salaries, supplies, taxes, insurance, equipment, etc are paid, anything remaining is profit.

my simple distinction is that if you work, you get a salary. If you do NO work whatsoever but are paid a return on your investment and that return exceeds all costs, that is profit. (the entity known as a "corporation" does no actual work)

Nothing the matter with either one. I've done both. I'm more successful being a soleP drawing a salary than I was being a corp trying to realize a profit.

Your mileage may differ !

 

[MAK-Deco]

I gotta agree with the distinction as Scott describes it.

Being an owner of a corp, you draw a salary and the corp makes a profit.

Being a soleP, you always are drawing a salary.


Basically, profit is the return on an investment. Yes, as a soleP you "invest" in equipment and with that equipment you earn money. BUT you are working to earn that money, that's a salary. Hopefully your salary increases each year.

With a Corp, it "invests" in you. The corp through your sweat equity pays you a salary and recoups its investment. After all salaries, supplies, taxes, insurance, equipment, etc are paid, anything remaining is profit.

my simple distinction is that if you work, you get a salary. If you do NO work whatsoever but are paid a return on your investment and that return exceeds all costs, that is profit. (the entity known as a "corporation" does no actual work)

Nothing the matter with either one. I've done both. I'm more successful being a soleP drawing a salary than I was being a corp trying to realize a profit.

Your mileage may differ !

Nicely said Arch.

 

[PinnacleResidential]

Personally, I feel it's semantics. If you are the owner of your own company, your profits and salary are essentially the same. The money that's left over at the end of the day is yours after all is said and done. I don't disagree with keeping very precise records. The longer I am in business, the more I see how important that is. However, whether you cut yourself a pay check at the end of the quarter is irrelevant to what your companies profits are and therefore, what your salary is. Let's say you made $100,000 after all was said and done. Bills are paid, employees are paid, etc. That 100,000 could sit in your company checking account the same way it could sit in your personal account. Either way, if you cashed out, it's $100,000 anyway you look at it. It's YOUR money because YOU own the company. I think of myself as THE COMPANY. If I've got money in the bank, it's my decision whether to save the cash, blow the money on a new car, house, watch, etc., or to reinvest in growing my business. Now, I should say that I also feel careful planning is in order. If I've got $100,000 left at the end of the year I may decide to reinvest $10,000 into my company, $12,000 into a company truck, $15,000 into stocks & savings, and keep the rest in my personal account. Maybe that means my salary is $63,000, $78k if you count the stocks and savings but I instead think that my salary and profit were both $100000 and I decided to make a personal investment to my company.

 

[PinnacleResidential]

As far as being a corp. You don't want your corp to make too much money at the end of the year because your getting taxed twice. Once on your income, once on your companies income. I wind up paying myself a higher salary so that my corp doesn't show much income so that I don't have to pay as much of the high corp taxes. But, at the end of the day, I'll invest right back into my company when it needs something. Then, at the end of the year, it's a write off for my own personal taxes.

 

[Brian]

Personally, I feel it's semantics. If you are the owner of your own company, your profits and salary are essentially the same. The money that's left over at the end of the day is yours after all is said and done.

I don't agree with this.

The company is a separate entity from you. It has a "life" all of its own. Granted, for most of us, we are very intertwined with our company. But we are also intertwined with our children and spouse-- yet they have their own lives.

It might seem like a semantic issue, and on a superficial level it is. Many things seem similar until we examine them from a different perspective. For example, compared to our cats, my wife and I are essentially the same. But compared to one another, we are very different.

Same with our business. If we view salary and profit the same then we are really making no distinction between ourself and the business. If we view salary and profit as different, we are viewing the business as a distinct entity.

Certainly, at the end of the day the money is all within our control. But our perspective on that money will be different if we view salary and profit as separate.

As an example, I get a specific salary, regardless of the profit. My salary is for me; the profit is for the business. Consequently, I have no temptation to even touch the profit. It's not there for me, it's there for the business.

Brian Phillips

 

[vermontpainter]

Well put, Brian.

 

[vermontpainter]

As far as being a corp. You don't want your corp to make too much money at the end of the year because your getting taxed twice. Once on your income, once on your companies income. I wind up paying myself a higher salary so that my corp doesn't show much income so that I don't have to pay as much of the high corp taxes. But, at the end of the day, I'll invest right back into my company when it needs something. Then, at the end of the year, it's a write off for my own personal taxes.

I hope you have a good bookkeeper and accountant. This approach is pretty much the other extreme from what my professionals advise. Nice to hear that its working for you. How long did you say you have been on your own?

If I remember right, you are about 24 years old, worked for your uncle for 10 years and then went on your own. Something here isnt quite adding up. How many years have you been running your business finances this way? You might want to seriously re-evaluate your methods. I know you are a business major and all, but you really should consult a good accountant several times a year. Lots of guys get in trouble during the first few years by making bad assumptions. Not being critical here, just trying to help.

 

[tsunamicontract]

As far as being a corp. You don't want your corp to make too much money at the end of the year because your getting taxed twice. Once on your income, once on your companies income. I wind up paying myself a higher salary so that my corp doesn't show much income so that I don't have to pay as much of the high corp taxes. But, at the end of the day, I'll invest right back into my company when it needs something. Then, at the end of the year, it's a write off for my own personal taxes.

Kinda what scott said, but yah I am fairly certain that your salary comes out of the business's gross sales along with everything else so you are only getting taxed once. I am getting a new accountant on wednesday because my current one is not up to snuff.

 

[Tonyg]

You guys are talking apples and oranges here. Pin is talking about a C Corp and everyone else is talking S Corp or LLC.

C Corp is taxed twice and S Corp is taxed same as a Sole Prop.