Business - Cash Flow, "Cash", Savings

[Jerk!]

Not sure I follow the logic. The IRS takes the same chunk either way.

yea thats the part i dont get, the irs takes it whether you distribute or retain. But I hear a lot of s corps saying they "have" to empty the coffers at year end. I'm generally annoyed at the amount we distribute thinking that money is better invested in long term growth than lining my pockets now.

 

[wct097]

yea thats the part i dont get, the irs takes it whether you distribute or retain. But I hear a lot of s corps saying they "have" to empty the coffers at year end. I'm generally annoyed at the amount we distribute thinking that money is better invested in long term growth than lining my pockets now.

Could be a state thing, but I'm thinking it's more of a bylaw thing. I would want to make sure that, at minimum, the distribution would cover tax impact of the K1, but the K1 tax implication doesn't change if the money is disbursed vs held.

Gotta be a bylaw thing. Some sort of agreement that says they're paying out x% of profits yearly.

 

[CharlieP]

It's a corporate earnings thing. If the corporation doesn't 'earn' anything because it paid out to shareholders then no tax at the corp level. If you have a small group of shareholders/partners, why leave the funds in the company accounts at the end of the fiscal year so they can be taxed at corporate levels and then be taxed as income to the individuals. When I had a business years ago we set our fiscal year end to June 30. Made settling things up much easier and didn't have to pay the owners out in December. Back then corp rates where 35%. I think corp tax is on dollar one and not like personal taxes where the bottom isn't taxed.

 

[Road Head]

Yes, businesses are that fragile, kind of. There are a very wide range of situations, and no real "one size fits all" answer.

In general, though, a business that has no cash reserves and is barely making ends meet really has no choice but to lay everyone off and shut down. There simply is no money to pay anyone.

However, look at the other end of the spectrum, and my wife and I are an ok example. We keep at least 6 weeks of payroll in our business checking account. Separately, we have plenty of cash/savings. When COVID hit, we shut down. 18 employees, out of work. So the question becomes...why did we not continue paying them? Well, no money coming in the door. Sure, we could have kept paying them, but that is our hard-earned money. We bust our behinds being fiscally responsible, and putting our business and personal finances in good shape. It would basically just be giving them our money for them doing nothing. It is a really, really difficult spot to be in. So what we decided was that the long-term outlook of our business was more important than the short-term outlay. We are the ones at risk by owning and running the business, so we are the ones that need to keep the cash, in order to make sure that we are still here next year, and the next, and the next. Pumping a ton of cash into our employees with no money coming in would put our business into a long-term disadvantage.

That being said, we spent a tremendous amount of time and effort to restructure much of our business so that many of them could start working again, remotely, about 2-3 weeks into the quarantine. We are currently operating at about 50% of pre-COVID, and there are several employees who chose to just not work at all, and others that are working almost at the level they were before. So we did what we needed to do to protect our business long-term, as well as support our employees the best we can. And for what it is worth, we aren't jerks. One of our employees has been in the process of getting a loan for her first house, and we kept paying her so that she could get her loan. It just really is about the long-term outlook.

 

[FinlayZJ]

That being said, we spent a tremendous amount of time and effort to restructure much of our business so that many of them could start working again, remotely, about 2-3 weeks into the quarantine. We are currently operating at about 50% of pre-COVID, and there are several employees who chose to just not work at all, and others that are working almost at the level they were before. So we did what we needed to do to protect our business long-term, as well as support our employees the best we can. And for what it is worth, we aren't jerks. One of our employees has been in the process of getting a loan for her first house, and we kept paying her so that she could get her loan. It just really is about the long-term outlook.

If they chose not to work, and are collecting unemployment, you might be required to report them. We are in GA. And this is becoming more and more common since unemployment benefits are more favorable than working in many cases.

Our Co-Op was earning $360/wk before taxes. He's getting $885/wk with unemployment.