Taking Money Out of a Business

Taking Money Out of a Business

• Business
• November 05, 2021

When taking money out of a business, transactions must be carefully structured to avoid unwanted tax consequences or damage to the business entity. Business owners should follow the advice of a tax professional to make sure financial transactions are controlled and do not cause unanticipated taxation or other negative effects.

For example, a shareholder of a corporation can make a loan to the corporation, and subsequent repayments of principal are not taxable to the shareholder. However, if the loan and repayments are not set up and processed properly, the IRS can reclassify the repayments as taxable dividends.

When an individual takes funds from a business, the transaction can be classified as:

·       Taxable dividend or distribution of profits.

·       Nontaxable distribution.

·       Nontaxable expense reimbursement.

·       Taxable wages.

·       Loan to the shareholder.

·       Repayment of a loan from the shareholder.

Failure to tightly control the nature of the transactions can have negative effects on the business and the business owner.

Intermingling Funds

One of the most dangerous financial mistakes a business owner can make is to intermingle funds, such as paying personal expenses from the business checking account or paying business expenses from the owner’s personal account. This can be done with the best of intentions with the business owner making adjustments in the books to separate the business and personal transactions, but the behavior can leave openings for the IRS or courts to question the integrity of the business entity or the transactions. Failure to maintain complete financial separation between a business and its owners is one of the major causes of tax and legal trouble for small businesses.