Another Reason I Hate Standard Companies

21 March 2019

 

Another Reason I Hate Standard Companies


Joe runs a Plumbing Business.  It has achieved a great profit of $200,000 in the 2017 year.  To reduce tax, the accountant has suggested the profits are kept in the company so only taxed at 28%.
Joe takes a lot of the profits out of the business to build his personal house, say $100,000.

Any issues?

2018 - another good year and $150,000 of profit.  So again, accountant retains within the company at 28%.

Joe also takes a lot of the 2018 profits to pay down his home loan, say $75,000.


ISSUES

1.  Joe has taken $175,000 over the two years that isn't his money.  It is the company's retained profits, not his personal money.  The company needs to charge him interest, creating more taxable income in the company, so more tax due sad

2.  The company has earned $350,000 profit and paid $98,000 tax at 28%.  But this is just an interim tax!  To get the profit out to the shareholders, dividends need to be declared at 33%.

  • So 5% extra tax is due or $17,500.



BIGGER ISSUE

Joe has a great start to the 2019 year.  The company earns $100,000 in the first 6 months and Joe takes another $50,000 as cash.  So, he now owes the company $225,000 (has an overdrawn shareholders current account of $225,000).

Joe's accountant talks to him about dividends and paying the extra $17,500 tax.  But Joe doesn't want to pay another $17,500 in tax, so does nothing.

  • The company is sued for a Health and Safety issue, $1 million fine.
  • The company goes into liquidation.
  • The liquidator chases Joe for the $225,000 overdrawn shareholders current account, plus interest.



This is a really common scenario, and it is really important to declare regular dividends for a business so that the profits fully pass to the shareholders.


I hope you have found this useful.  You can also check out an earlier Blog I wrote for another reason I don't like Standard Companies:  Click here to read.


Kind regards
Ross Barnett

 
 
 
 

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