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Posted by Paul Thomas on December 9, 2007, 2:41 pm
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> Since there is no concept of share prices (which derives its value
> from the Net Income - NI), why should a privately owned company, which
> is typically owned by a family, let's say, have NI?
>
> Why can't the owners compensate themselves after everyone else, all
> expenses, taxes, etc. has been paid? NOTE: When the owners
> compensate themselves, this is still an *expense* in the accounting
> sense.
>
> Suppose that the company has $10,000,000 in revenues; $5,000,000 in
> wages (but not including the wages of the owners, which is drawn from
> the money left after COGS, taxes, etc.), costs of goods, and
> depreciation; $2,000,000 in taxes. The company now has $3,000,000 in
> which to pay their owners. So then they pay their owners, and the
> accounting looks more like this:
>
> Revenues: $10,000,000
> COGS/depreciation/Wages cost: $10,000,000
> NOTE: The company pays no taxes since they don't have an earnings.
>
> From a tax-efficiency point-of-view, this is a very good idea, I would
> think.
For some business entities this is exactly what happens (or close enough to
it). PSC's are more likely to be doing this as often as possible. Not so
much so with other business types, depending on the type of business. Also
of great concern is cash flow. Can't pay out profits if there isn't any
cash there.
As mentioned by others, executive compensation issues may become an audit
issue. Most commonly found in larger companies where the profits are not
tied to the owners efforts alone, and where their salary is already over the
FICA cap ($100,000+/-).
--
Paul A. Thomas, CPA
Athens, Georgia
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