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How you would pay yourself as a small business owner is a question that requires contemplation. You can pay yourself a salary, or can receive dividends, or a combination of both. However, the decision on salary vs dividend is influenced by a variety of factors such as personal and corporate tax structure. Considering this, each way of paying yourself comes with pros and cons. Moreover, in almost all cases there is a discrepancy of a percentage or two that can work in your favor or against you, and this potentially influences your decision on how to compensate yourself. To provide you with clarity on the subject here is a comparison of paying yourself in salary vs dividend.
Compensating yourself in Salary
As mentioned above you can compensate yourself with a salary as well as with a dividend. If you choose to pay yourself salary, you can reap certain benefits but will also have to bear the disadvantages that come with it.
By compensating yourself in salary, you ensure a personal income. With a personal income, you will be able to contribute toward the Registered Retirement Savings Plan (RRSP) and Canada Pension Plan (CPP). As your CPP is based on how much and how long you contribute, paying yourself in salary will help you consider this important retirement plan. Regarding tax benefits, the salary or bonus you pay yourself will be a tax deduction for your small corporation. Additionally, you can implement income splitting by paying salary to related employees such as a spouse or children and avail of income tax benefits.
Having a personal income may also turn out to be a drawback. Unlike dividends, which are taxed at a lower rate, salary is a hundred percent taxable. This might increase your tax load. If your business profits vary every year, paying yourself with a salary can result in taxation issues, as you will not be able to carry forward business loss. With regards to CPP you will have to contribute toward it as an employer as well as an employee. Furthermore, it will also require you to set up a payroll account with the Canada Revenue Agency.
Compensating yourself in Dividends
Many business owners choose to compensate themselves via dividends. Paying yourself in dividend comes with the following advantages and disadvantages.
Dividends are taxed at a lower rate than salary hence you save yourself from the load of personal tax. Additionally, when paying yourself in dividend, you will not have to pay toward CPP, which will save you money. Unlike salary, paying yourself in dividend is much simpler. You write a check to yourself from the company, update your minutes books, and prepare a director’s resolution for dividends paid.
Apart from the benefits you reap, there are certain disadvantages. Compensating yourself in dividend does not allow you to contribute toward retirement benefits like RRSP and CPP. Dividends can also disallow you from enjoying the benefits of personal income tax deductions.
Whether you pay yourself in salary or dividend is completely dependent on the type of business, and your personal financial circumstances. A detailed understanding of types of corporations and related tax structure, as well as your personal financial management, will help you make the best decision. Guidance of a financial and tax consultant is recommended to help you choose the best from salary vs dividend.
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Are you experiencing cash crisis? Are most of your cash blocked in inventories and non-liquid assets? In today’s world, the use of the digital transactions is quite popular. However, businesses still need to have sufficient amount of liquid cash in case of any emergencies. If pure cash is not possible, then assets that can be quickly converted into cash should be present. Lack of cash or liquid assets can affect the smooth functioning of business transactions and therefore, you must improve your cash flow for the same. So how do you improve your cash flow? Here’s what you can do.
1. Mention The Payment Terms
When you enter into a transaction with your debtors, make sure you specify the conditions for making payments. In the case of a delayed payment, you can charge the interest to your debtors. As a result, debtors would ensure payments are made as per the due date. Similarly, you can reduce the credit period by offering rebates or discounts to debtors who make early payments. However, care should be taken that early payments are made at least a week or a month in advance and not just a few days before the due date. For this purpose, it is important that your debtors are aware of the payment terms.
2. Invoice Immediately
As a professional, you should invoice your debtors immediately after the goods or services are provided. This is best applicable when there is no credit period for transactions carried out. For transactions on a credit basis, you can still invoice your debtors in advance and expect the payment to be made on the due date. Accordingly, you can send a reminder message when the due date arrives. Do not delay the process of invoicing and wait for the end of the month. This would mean no cash inflow for the particular time period and moreover, if you do not have a bookkeeping system, you may even forget about the payments collection.
3. Deposit Immediately
When you get paid, deposit the checks immediately. Do not keep waiting for other payments to come along and deposit the money in the bank later. Timely deposits ensures that there is a continuous inflow of cash in your bank account and thus, helps in improving your cash flow. If you delay, there is the possibility of a bounced check if the debtor does not have sufficient cash available with him. Thus, the quicker you deposit, the better it is. The cash is readily available in your bank account whenever you need it.
4. Make use of Online Payment Options
Most businesses use online platforms to make payments. It is quick, safe and easier to transfer funds easily. Moreover, there is a real time gross settlement of transaction that is taking place. Some of your debtors may be comfortable in using these online payment options and if you hesitate in accepting these payment mechanisms, then they may ask for a longer credit period from you. Thus, your working capital can be affected.
5. Forecast And Plan For Future
The seasonal business trends can slow down business activities and transactions may reduce. As a result, you may not have sufficient cash to make payments to your creditors or your employees. Therefore, plan for these trends and ensure that sufficient cash is available to overcome any cash crisis. Do not keep all your money rolling in the working capital and keep some cash aside to assist you in difficult times.
There are some cash hacks that you can use to improve your cash flow. If you need assistance in order to deal with cash flow problems, it is recommended to take the help of a professional accountant firm in Edmonton. The professional accountant firm would not only help in improving the cash flow but would also suggest some tips to improve the overall efficiency of your working capital and get more cash inflows in your business.