February 7, 2013 Leave a comment
The Sole Proprietor’s Dilemma
The biggest dilemma a sole proprietor faces is developing a regular income in the early years of the business. The primary reason is the limited amount of gross revenues to pay for operating costs. This usually leaves little for net income to the business owner. To better understand the basis of this dilemma, think of the business as a large funnel.
Revenue from all sales is collected. Revenue dollars pay business debts BEFORE salary paid to the business owner. Dollars left AFTER all business costs are paid are taxable income to the business owner.
Many sole proprietors confuse the revenue coming to the business as having an immediate % payable to the sole proprietor as personal income or salary. Salary to a sole proprietor is NOT a tax deductible cost to the business.
Salaries, FICA and benefits ARE business deductions, but only for employees. When a business starts paying employee salaries hiring an Accountant is recommended. This is a tax deductible business expense.
When starting a business, the desired owner income should be included when projecting bottom line outcomes to determine the sales level needed to provide adequate net income. Remember, this is the money left AFTER business costs are paid.