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How to draw dividends before year end?

TreyAllDay

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Hey fastlane fam!

So this is the newest interesting challenge I have come across, or didn't think about when I set up for corporation. For some odd reason, I thought you could pay yourself dividends whenever you wanted throughout the year. However, the case seems to be, you can only do this after year end?

My business cash flow is doing good, and the bank account is filling - I have calculated the estimated taxes and amount I can pay myself, which I planned on cashing out 65% of profit for the first year. However, how exactly does an entrepreneur pay themselves before year end? I've heard people talk about draws on dividends, but also loans you have to pay back at interest? Not exactly at the point where I can afford an accountant, although I do know how important they are.

I am in Canada, if it makes a difference, however I'd think US laws are similar.
 
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MidwestLandlord

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I pay myself a weekly salary. That makes my income budgeted and accounted for, not some after-thought at the end of the year.

Plus, since I don't need that cash to improve or grow the business, that gets it out fast so I can grow it elsewhere.
 

JAJT

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Canadian here.

I recall my accountant discussing paying yourself in dividends as opposed to a salary for certain tax benefits. I don't recall the details but I think salary and dividends are taxed differently for yourself and/or your corp.

however I'd think US laws are similar.

Word of advice: DO NOT take advice that applies to the USA and assume it applies to Canada. We are not the same, especially as it pertains to difference between a US LLC and a Canadian corporation.

What you need is an accountant.
Not google. Not forum advice. Not a mentor. Not financial blogs.
An accountant.

An accountant is one of the biggest assets that you NEED on your team as a business owner.
You don't know what you don't know - they do.

In the short time since I've had an accountant they saved me the mistake of taking on a 50% tax burden because of the setup I wrongly assumed would work in Canada. They saved me having to report to the IRS needlessly. They saved me the risk of an audit and risking my personal assets based on how money moved through my business that I assumed was no big deal. They've advised me against accepting cash from a third party into my business which would have opened myself up to a can of worms with the CRA and instead they helped me organize it in a tax free way that the CRA doesn't care about.

Accountants are worth their weight in gold.
 

TheSmokey1

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I was writing a response, but it was nearly the same as JAJT's, so my advice is to listen to him. You can't afford to NOT have an accountant. You say you want to cash out 65% of the profit for the first year? Use some of that money to find yourself an accountant and maybe that means you only cash out 62% of your profits.
In the long run , an accountant will save you more money than they cost. When I was smaller, I was paying maybe $300 - $500 a year for an accountant's advice.

Years ago I had inadvertently made a mistake that cost me over 6K in fees and fines, that likely would not have happened if I had my current bookkeeper/accountant involved. It doesn't matter if it was a mistake or not, the government is going to get their money. It is a very lonely feeling to get a letter from the government saying you owe them $6500 (that you may not have), and you have 30 days to pay it. That one issue cost me more than 5 years of what my accountant currently charges.

Another example: Again, years ago, I had a hard time keeping up and found an outside bookkeeper to help us with the books.
Our accountant recommended a new bookkeeper, someone who had worked for him before. When she came in and got our accounting straightened out, we discovered that we were missing $10-$20 grand that we hadn't collected, because we didn't know about it. With things fixed, we were able to collect most of that missing money. Finding those problems in our accounting system paid for years worth of her work.

Don't risk it. A good accountant can help you avoid mistakes that can cost a ton of money, and can help you legally and correctly get the most you can out of your business. Not to mention the peace of mind of KNOWING how and when you can take a dividend.

BTW, I am in the US, I take a dividend every month.
 
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JAJT

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REP+ @TheSmokey1

It's worth noting that those examples you and I gave aren't even rare occurrences - they are very typical once you start working with professionals who know their trade.

You'd get a lawyer before considering dabbling in legal matters.
It makes total sense to get an accountant when dabbling in financial ones.
 

TheSmokey1

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REP+ @TheSmokey1

It's worth noting that those examples you and I gave aren't even rare occurrences - they are very typical once you start working with professionals who know their trade.

You'd get a lawyer before considering dabbling in legal matters.
It makes total sense to get an accountant when dabbling in financial ones.

Thank you very much. Agreed, they are VERY common. Folks that have not been through it before think that it is a "sky is falling" type argument. It is not. Stay in business long enough and these things (or something similar) WILL happen.
 
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MJ DeMarco

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@CareCPA might be able to chime in with professional experience.

From my experience (assuming you have a pass-thru like an S-corp) you can take dividends at any time -- but you NEED to pay yourself a salary commensurate with your business. Otherwise you invite unwanted scrutiny by those who we don't speak of.

A PROFIT of $100K and paying yourself $100K in dividends and $0 salary is an invitation for trouble.

$50K salary, $50K dividends is more reasonable and less likely to be perceived as tax avoidance.
 
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Harbourmaster

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I think this is probably an appropriate place to ask this question. There seems to be a number of big players posting in this thread with sizeable money systems. One thing that has been on my mind while I build my money system is whether or not to keep/purchase the income producing assets such as ETF's within the company (or a second holding company) or to pay myself first and then purchase the assets. Buying $100K worth of ETF's within a company makes more sense to me than paying myself $100K, paying $40K in taxes and then buying $60K of ETF's with what is left over.

I fully acknowledge that my money system is not big enough to warrant all my attention and that my focus should remain on growing my business as priority number one, but it is growing and I want to lay the proper foundation as I go. If this a a red Ferrari type question, I guess everyone needs to be told once...
 

CareCPA

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Hey @MJ DeMarco , thanks for calling this to my attention.

The rest of this post will be US-focused. Unfortunately, I do not have substantial Canada tax experience.

You don't have to wait until year-end. If you are an S Corp, you can distribute at any time, as long as during the year you take a reasonable salary (as mentioned before). Even on the payroll side, I have seen companies that pay "payroll" during the year, but then only file their withholding forms at the end of the year. Not saying this is the correct way, just that I've seen it done (essentially saying they just write themselves one large paycheck in December).

If you are a C Corp, you also shouldn't have to wait until year-end. Think of all the companies that declare dividends quarterly.

The real question is: do you mean dividends as the actual financial term, or do you just mean getting cash out of the business to pay yourself? Terminology is important here, and will factor into the correct mechanism of getting your cash to you.

Also, to @Harbourmaster , if you were a passthrough entity in the US, the $100k you would invest in ETFs would still be considered in your taxable income. The fact that you are investing in a financial instrument does not in and of itself lower your taxable income. Holding common financial instruments in a passthrough entity actually creates an additional level of complication that just isn't necessary (or beneficial).
If you were a C Corp, same thing. It would not lower your taxable income, and you would still have to come up with the cash to pay the tax on the $100k of income.

As mentioned before, please consider this as general (US) knowledge. You should seek out an accountant who specializes in Canadian tax law.
 
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TheSmokey1

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@CareCPA ...

From my experience (assuming you have a pass-thru like an S-corp) you can take dividends at any time -- but you NEED to pay yourself a salary commensurate with your business. Otherwise you invite unwanted scrutiny by those who we don't speak of.
...

I am an LLC taxed as an S Corp, and this is what I do. I wanted to be conservative and try to not attract any unnecessary negative attention so I do roughly 70% of my income on payroll and 30% on divs. Sometimes this comes out more like 60/40. I have been told that there is no defined ratio from the government that is "ok", but I would think that anything under 50/50 is going to be more likely to attract attention.
I have been told to consider what is fair market value for someone in your same field. For example (just made up): If you have a business doing graphic design, and the average graphic designer working full time makes $45,000/year. You have $65,000/year to pay yourself. You don't want to pay yourself $10k and give yourself $55K in divs or distributions. That will look like you are trying to avoid paying taxes. But if you paid yourself $40-45K on payroll, and $20-25K in divs, you should be ok.
 
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Harbourmaster

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Hey @MJ DeMarco , thanks for calling this to my attention.

The rest of this post will be US-focused. Unfortunately, I do not have substantial Canada tax experience.

You don't have to wait until year-end. If you are an S Corp, you can distribute at any time, as long as during the year you take a reasonable salary (as mentioned before). Even on the payroll side, I have seen companies that pay "payroll" during the year, but then only file their withholding forms at the end of the year. Not saying this is the correct way, just that I've seen it done (essentially saying they just write themselves one large paycheck in December).

If you are a C Corp, you also shouldn't have to wait until year-end. Think of all the companies that declare dividends quarterly.

The real question is: do you mean dividends as the actual financial term, or do you just mean getting cash out of the business to pay yourself? Terminology is important here, and will factor into the correct mechanism of getting your cash to you.

Also, to @Harbourmaster , if you were a passthrough entity in the US, the $100k you would invest in ETFs would still be considered in your taxable income. The fact that you are investing in a financial instrument does not in and of itself lower your taxable income. Holding common financial instruments in a passthrough entity actually creates an additional level of complication that just isn't necessary (or beneficial).
If you were a C Corp, same thing. It would not lower your taxable income, and you would still have to come up with the cash to pay the tax on the $100k of income.

As mentioned before, please consider this as general (US) knowledge. You should seek out an accountant who specializes in Canadian tax law.

Thank you for your reply @CareCPA I am going to follow everyone's advice and seek the advice of a qualified accountant that specializes in Canadian tax law.
 

CareCPA

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I am an LLC taxed as an S Corp, and this is what I do. I wanted to be conservative and try to not attract any unnecessary negative attention so I do roughly 70% of my income on payroll and 30% on divs. Sometimes this comes out more like 60/40. I have been told that there is no defined ratio from the government that is "ok", but I would think that anything under 50/50 is going to be more likely to attract attention.
I have been told to consider what is fair market value for someone in your same field. For example (just made up): If you have a business doing graphic design, and the average graphic designer working full time makes $45,000/year. You have $65,000/year to pay yourself. You don't want to pay yourself $10k and give yourself $55K in divs or distributions. That will look like you are trying to avoid paying taxes. But if you paid yourself $40-45K on payroll, and $20-25K in divs, you should be ok.
Another fun tidbit (yes, I actually think this is fun), is that you can weight your salary to what you do.
For example, maybe you spend 30% of your time on admin, 20% sales prospecting, and only 50% doing actual graphic design work. If we assume an admin and a salesperson make less than a graphic designer, you can justify a lower salary.
 

JAJT

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I've shared this before but I think it's worth mentioning:

A lot of folks in this thread are talking about US situations. Which is cool - that's where most of the forums members are from on here. However, one might get the impression based on all this kick a$$ advice that "huh, maybe I should start a US LLC as an S corp and just take their advice".

Nobody here has said that of course - but it's the kind of conclusion a novice can VERY EASILY make (I made it myself, embarrassingly enough).

When discussing the situation with a lawyer I was told in no uncertain terms that doing this would mean involving the IRS in something they really had no business being involved with and that all income from the corporation would be taxed at the very highest corporate tax rate - even on the first dollar.

It's overly confusing that things in the USA don't work like things in Canada but it's a point really worth driving home. Things that sound good and make sense simply may not apply.
 
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CareCPA

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It's overly confusing that things in the USA don't work like things in Canada but it's a point really worth driving home. Things that sound good and make sense simply may not apply.
+1. Sorry for any confusion.
 

ZCP

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Hire a local accountant with experience working with businesses in your industry.
Put it in the budget. Forget it is there. Reap the rewards.

If only stocks returned as much as a good accountant!!
 

SquatchMan

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You don't want to pay yourself $10k and give yourself $55K in divs or distributions.

I know someone that tried that stunt, a CPA of all people. Paid himself 10k in salary and took a 100k distribution for two years.

Got an IRS audit. The IRS adjusted his salary to 85k and said he owed payroll taxes + interest on the difference. And we know what happens to people that don't pay the IRS.

Two lessons from that story:
1. Don't F*ck with the IRS.
2. Don't hire that guy as your CPA.
 
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TreyAllDay

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Canadian here.
What you need is an accountant.
Not google. Not forum advice. Not a mentor. Not financial blogs.
An accountant.
.

Yea I hear you - here's the problem is, I would say we're doing "OKAY" for cash flow because we're grossing near $2400-$3000/month which is okay considering we're in month 3. BUT, my personal expenses at bare minimum are $1750/month. Now, after taxes - I end up profiting around $1700/month which really, at this point, will not leave room for an accountant. Maybe near tax time - I have a few opportunities that will soon add an additional $1000 or so per month of wiggle room. But realistically, it's just not at the point where I can afford it. I figured, if I can pay myself $1500 out of my $1750 after-tax profit in dividends, I'll be okay. Paying salary means both I and my business have to contribute to CCP, and etc - it just leaves so little room lol.

Anyway, I'll figure it out. I guess I just need to see what an accountant would cost. Maybe it's not as insanely expensive as I thought.
 
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ZCP

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Sounds like I am moving to Alberta to be an accountant if they cost that much!

Accountants are inexpensive. Average < $2k a year for our companies...... you could probably get all you need for advice for the question at hand for $xxx and then get your end of year taxes done for <$1k total....
 
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JAJT

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But realistically, it's just not at the point where I can afford it.

What you're referring to is a bookkeeper/bookkeeping.

Bookkeeping is a monthly expense to keep track of all your accounts, sort them properly, and keep your shit together properly to make tax time a breeze.

An accountant is a professional who can advise you like a lawyer on matters of finance. They also are the ones who actually handle your taxes come tax time. They are not a monthly expense. Advise is usually free, or very affordable (an hour of their time in a meeting, for example, or a phone call).

Also, realistically, you can't afford not to have one, regardless of your income level. It's like saying you drive a car or own a house and can't afford insurance. It makes no sense because anything that can possibly happen will far exceed the cost of these things.
 

TreyAllDay

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What you're referring to is a bookkeeper/bookkeeping.

Bookkeeping is a monthly expense to keep track of all your accounts, sort them properly, and keep your shit together properly to make tax time a breeze.

An accountant is a professional who can advise you like a lawyer on matters of finance. They also are the ones who actually handle your taxes come tax time. They are not a monthly expense. Advise is usually free, or very affordable (an hour of their time in a meeting, for example, or a phone call).

Ahh... okay I think this is what I needed to hear. I always assumed an accountant was like, someone who constantly reviewed your books on a monthly basis, combed through accounts, etc.
 

TheSmokey1

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Ahh... okay I think this is what I needed to hear. I always assumed an accountant was like, someone who constantly reviewed your books on a monthly basis, combed through accounts, etc.
Like I said, at first I was only paying $300/year to my accountant. They helped answer questions to make sure I was doing things the right way. Even now, I only pay my accountant about $1500 a year, for advice and to do my taxes.

EDIT - Just make some calls to accountants near you. Ask them what they charge to meet for an hour or two. Go with a specific list of prepared questions, like the reason you started the thread. They will also ask you questions about your business and how it is structured. I would be surprised if it cost you more than $200 - $300 AT MOST. It is nothing to be afraid of, most of them are great people.
 
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JAJT

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I would be surprised if it cost you more than $200 - $300 AT MOST

Or free.

I've received lots of free advice from my accountants for simply picking up the phone.

It's not worth their time to chase you for $50 in consulting fees considering what they'll charge to do actual work for you (like taxes, as mentioned)
 

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I am a single-member LLC S-Corp. What happens in the first year, say, you have $3,000 in expenses and $0 income. How do you justify paying yourself? Or, in other words, how do you approach it there?

What happens if you only make 1 sale, which only generated $2 profit, and so your bottom line is a loss of $2,998?

And while we're on the topic, is it true that if you do not make a profit (or do not have business income), then you can't deduct the expenses on your personal income taxes as a pass-through entity?

***This is more hypothetical and just curious how it works.***
 
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CareCPA

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Here are some US SPECIFIC answers:

I am a single-member LLC S-Corp. What happens in the first year, say, you have $3,000 in expenses and $0 income. How do you justify paying yourself? Or, in other words, how do you approach it there?
You don't. You most likely wouldn't have any payroll that year. It also wouldn't be worth the formalities of an S Corp since you don't have enough income to take advantage of the benefits. You should have stayed a single-member LLC treated as a disregarded entity and saved yourself the fee of having an extra tax return prepared (the disregarded entity would just show up on your Schedule C).

What happens if you only make 1 sale, which only generated $2 profit, and so your bottom line is a loss of $2,998?
Then you have a loss of $2,998. I'm not sure what the question is here...
You would be in the same situation as above.

And while we're on the topic, is it true that if you do not make a profit (or do not have business income), then you can't deduct the expenses on your personal income taxes as a pass-through entity?
You can deduct losses from a passthrough to the extent you have "basis" in the company. This basis can be created through capital contributions or recourse debt.

Maybe I should do a tax primer for those that are US-based?
 

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You don't. You most likely wouldn't have any payroll that year. It also wouldn't be worth the formalities of an S Corp since you don't have enough income to take advantage of the benefits. You should have stayed a single-member LLC treated as a disregarded entity and saved yourself the fee of having an extra tax return prepared (the disregarded entity would just show up on your Schedule C).

I guess I was misled then. I went through LegalZoom (will never do that again) and they made it sound like I had to set up the S-Corp right away. Does that change anything in regards to passing through the deductions to my personal income? Is there any way to fix this or just let it go?

I tried to research S-Corp, but didn't get anywhere with it so I had to make the decision to just do it while I was still eligible for the year.

Then you have a loss of $2,998. I'm not sure what the question is here...
You would be in the same situation as above.

I guess if the answer to the first question was, "you don't," then the second question was answered as well. I can't remember the intention of the question.

You can deduct losses from a passthrough to the extent you have "basis" in the company. This basis can be created through capital contributions or recourse debt.

I added my own money to the company originally so I have some money sitting in the business checking account. Is that what you mean?

Maybe I should do a tax primer for those that are US-based?

That would be appreciated! And thank you for taking the time to answer my questions.
 

CareCPA

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I guess I was misled then. I went through LegalZoom (will never do that again) and they made it sound like I had to set up the S-Corp right away. Does that change anything in regards to passing through the deductions to my personal income? Is there any way to fix this or just let it go?
I would just let it go. It won't really be detrimental, other than an extra tax return cost.

I added my own money to the company originally so I have some money sitting in the business checking account. Is that what you mean?
Yep, that would give you basis to take losses.

I'll work on pulling something together. If anyone has specific questions for me to include, please PM me. I don't want to clutter up the OPs thread here.
 
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TreyAllDay

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Or free.

I've received lots of free advice from my accountants for simply picking up the phone.

It's not worth their time to chase you for $50 in consulting fees considering what they'll charge to do actual work for you (like taxes, as mentioned)

Thanks man. I've since reached out to an accountant and appreciate your advice!!
 

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