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Articles in Category: Start-ups

How to pay yourself if you are a small business owner – Part 1

on Tuesday, 13 January 2015. Posted in Accounting, Consulting, Start-ups, System Implementation, Tax

Actual transfer of the cash from business to owner

How to pay yourself if you are a small business owner – Part 1

Photo title: Money being cut into many pieces. Source: TaxCredits.net

Licence: https://creativecommons.org/licenses/by/2.0/legalcode

What is the most tax effective and correct way to get the profit of your business in your personal bank account?

This is a problem that numerous small business owners struggle with. I will attempt to clarify some of the issues relating to this, give advice on the correct practical way to handle the profit extraction and the tax implications thereof. This will be done in a series of blog entries. At the end of each entry I will give the business owner a practical change to implement in his/her business.

Sole proprietor

I would first like to clarify that if the business trade as a sole proprietor, I will still refer to the business as a separate entity. Substance over form, the business is still a separate entity although it has the same legal personality as the owner.

Sole proprietors frequently have one bank account for their business and their personal account. This causes a lack of segregation and at the end of the day there is no transfer of cash from the business to the owner, as the cash is already in the account of the owner. A situation like this makes it very difficult to keep track of how much money the owner is actually receiving from the business.

Although this was not possible at all banks in the past, it is now possible to open a business account when the entity has a legal form of sole proprietor. I have verified that is possible at FNB, I am not sure about the other major banks. If your current bank does not allow this, they will allow a cheque and savings account or an additional savings pocket. You can then use one of the accounts for business and one for personal.

The bottom line is that there needs to be an actual transfer with a paper trail from business to owner.

Close corporation or Private Company

This type of legal entity will have a separate bank account in its own name. The danger here is that the owner uses the business account to pay for personal expenses. This is not illegal, but it creates a lack of segregation and increases the administrative burden of processing the bank account of the business in the relevant accounting software. If this method is used the loan account of the owner (which will be debited with each personal expense) will give rise to a deemed dividend if it has a debit balance, this will be discussed under the tax consequences.

Also here I strongly recommend that there is an actual transfer from the business account to the personal account of the business owner.

Practical change to implement for part 1

Whether you are a trading as a Sole Proprietor, Close Corporation or Company, you need to implement discipline in your business by doing an actual transfer from the business account to your personal account whenever you extract profit to yourself. When you do this transfer on your internet banking, clearly label the description something like “Profit Distribution – Name – Month” or “Salary – Name – Month”.

Author: Chris Herbst

Contact: https://www.chconsulting.co.za/contact

Business growth and good coffee takes time

on Tuesday, 02 April 2013. Posted in General, Consulting, Start-ups, System Implementation

Business growth and good coffee takes time

Why do some small businesses not grow? I believe the main reason is that these small businesses wants their growth the same as their coffee. When their budget is tight they are indeed prepared to make the coffee themselves, so they make instant coffee. When funds become available they buy freshly roasted coffee from a drive through, instantly.

My point is that whether these small businesses have funds or not, they want growth to be instant. Some of these small businesses do implement measures for growth and then they quickly realise there is no instant results. So in most cases the measures fade away because no results are visible. Most real sustainable growth happens over time, similar to planting a seed today and only harvesting the crop in a future season and the crop may fail a few times along the way.

Being a coffee enthusiast myself, I can tell you that a good cup comes at a cost. I prefer to buy my beans from the roaster or a retail outlet that is directly affiliated with a local roaster, meaning they get freshly roasted coffee at least weekly. I do not buy the beans that are on the shelves on most supermarkets as they are in most cases guaranteed to be stale after a month from roasting date. Further I do not buy ground coffee as with that the freshness along with the taste is basically lost 3 minutes after grinding it. I buy beans and grind it myself, preferably with a hand manual grinder. An electric grinder is fine if it is a decent burr grinder, but the decent ones are usually the industrial ones and are rather expensive for the home user. You have the electric blade grinder as a cheap alternative but it gives you an inconsistent grind (coffee particles vary in size) and the heat of the rotating blades damages the coffee's taste. There is a reason to this madness, if done correctly you will get the most amazing and authentic coffee taste. Coffee should never be bitter. And you should never kill coffee with sugar! The reason people drink sugar in their coffee is exactly because it is prepared incorrectly and then tastes bitter.

Please reread the above paragraph with instant versus patient, cheap versus quality and healthy versus unhealthy in the back of your minds. Now compare the analogy to your own business and measures for growth, if any.

I want to communicate to small business owners that they must not give up on implementing strategies to grow, rather develop patience and a long term view. Be relentless in implementing small additions to your main vision of growth and direction, but remember it takes time, so also be relentless in developing patience.

http://www.chconsulting.co.za/contact