Planning - Get the Most Out of It
Ideas to Maximize Your Dollars

By Kimberly D. Overman, CFP

If you put your heart and soul into running your business, it makes sense to get the most out of it. Salary is an obvious way to compensate yourself, but a few planning strategies can help maximize your take-home dollars and your business.

Getting the most out of your business may include growing your company to operate at its fullest potential for its eventual sale. This may involve raising capital to expand. There are a number of ways to raise capital for business expansion. A trip to the bank for a loan is often the obvious choice, but not always the best one when attempting to raise capital.

How should you compensate yourself?

As a business owner, you have a number of ways to compensate yourself. In most cases, you want to maximize your take-home dollars and reduce tax liability.

If you own a C corporation, you will avoid double taxation if you take more of your compensation in the form of salary and less in the form of distributions. Distributions are taxed as income at the corporate level, then again as income to you. Your salary is taxed as income to you, but it is a deductible expense for the company. You may be able to reduce your tax liability by compensating yourself with wages rather than distributions.

In contrast, if you own an S corporation, you may want to take less money in the form of salary and more in the form of distributions. Distributions paid out by an S corporation may be treated as a tax-free return of stock basis.

Another way to draw money out of your company is to lease property to your company. The lease payments are a deductible business expense, and you receive a stream of income that is not characterized as wages or distributions.

What about employee benefits?

Attractive employee benefit packages can help you get the most out of your company in a number of ways including allowing you to prepare for your eventual retirement. First, you can participate in any employee benefits packages that you have put in place for the rest of your employees. Second, employee benefit plans help you recruit new employees and retain those who are crucial to your company's success. Third, you receive tax benefits when offering your employees benefits. The cost of providing employee benefits is often deductible, and the value of the benefits provided may be excludable from your employees' gross income. This allows you to compensate yourself and your employees without increasing your taxable payroll.

How can you minimize payroll taxes?

Minimizing Social Security payroll/self-employment taxes can be a significant issue for you if you are an owner-employee. As an owner-employee, you have more power to control your earnings and minimize the Social Security taxes you pay. Over the term of your working life, you may pay more into the Social Security system than you can ever hope to recover, so planning here is important. Here are some planning ideas:

• Bunch earnings: You can delay collection of accounts that would be considered current income until next year. This may reduce your current payroll tax. However, this will not work if you have a "cash business."

• Reduce compensation in excess of the maximum earnings base: Once you have reached the maximum earnings base, you will never receive more in benefits, even if you pay more into the system. At this point, you will want to limit further earnings to minimize your tax.

• Create exempt family employment: If your child works in your sole proprietorship and is under 18, you are not required to pay Social Security tax on his or her wages.

• Restructure your business entity: If you restructure your company as an S corporation, you can take more compensation in the form of tax-free distributions, and avoid additional payroll tax on your own compensation.

What is the best way to raise capital for your business?

One way to get the most out of your business is to grow the company to its maximum potential. Often this requires funding, which can come from a variety of sources.

• Venture capital: Venture capitalists are willing to invest large amounts of money into a company if they foresee a significant return on their investment.

• Borrowing: If you qualify for a bank loan, you will retain ownership and control. In some cases, you will be asked to personally guarantee the loan as well.

• Private funding: Private funding may involve a private loan or a private sale of stock.

• Small Business Administration: The SBA is primarily a guarantor of long-term business loans, but some direct loans are available.

• Initial public offering: Going public is a way to sell shares of your company to the public. It is a very expensive and complicated process that must comply with state and federal securities regulations.

• Selling shares or assets: You can sell shares or assets of your company to raise money. In either case, you may have to give up control or something of value to receive the funding.

Successful business owners run their businesses successfully by planning and tweaking the details. It’s worth a little research and effort to explore possibilities that may save you a lot in the long run.