Can I use the profits from my small business for personal use?
by sarahmillican, Community Moderator
- Created: January 18, 2011, 9:28 pm
- Updated: May 27, 2011, 1:05 pm
Unfortunately the answer to this question is not always a simple yes or no. In most cases, the answer likely depends on several factors, most importantly, your business structure.
The descriptions of the structures below will help you understand who is able to make the financial decisions within your company, including how to spend business profits.
Keep in mind, the following information is provided to assist and is not intended to be legal definitions, so before catching the next flight to Tahiti with your business profits, make sure you contact an attorney, accountant, or other financial advisor to determine proper legal action.
You may operate your business or organization under a variety of structures, but keep in mind, each type of structure has certain advantages and disadvantages that should be considered.
- Sole Proprietorship - is one individual or married couple in business alone (without additional partners). A sole proprietorship is the most common business structure and is the easiest to form and operate. If yo;re operating in a sole proprietorship you will be able to enjoy greater flexibility of management and fewer legal controls. All income generated by a sole proprietorship is received by the owner to keep or reinvest according to their discretion. However, with the privilege of total control, comes financial liability. Owners are legally responsible for their busines-s financial obligations, meaning your personal assets can be used to help satisfy debt incurred by the business.
- General Partnership - two or more persons (usually not a married couple) who agree to contribute money, labor, or skills to a business. If yo-re operating under a general partnership, each partner shares the profits, losses, and management of the business and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement' also known as an operating agreement - and should be carefully reviewed before using profits for personal use.
- Limited Partnership - similar to general partnership, but more complex organization. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partne's investment percentage. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment.
- Limited Liability Partnership - similar to a General Partnership except that normally a partner does not have personal liability for the negligence of another partner. This business structure is used most commonly by professionals such as accountants and lawyers. Typically LLP profit distribution is outlined in the operating agreement between the partners. Read more about professional limited liability companies (PLLCs).
- Limited Liability Company - formed by one or more individuals or entities through a special written agreement. The agreement details the organization of the LLC, including management, business interests, and distribution of profits or losses. Read more about limited liability companies (LLCs).
- Corporation - legal entity which gives you certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as decreased personal control. Typically, corporations are formed with a board of individuals controlling profits and financial decisions so be sure to understand all legal ramifications before launching a corporation.
For most people who own their own businesses, especially small or home-based businesses, the profits go directly to the owners.
After all employees have been paid and business expenses taken care of, the remaining business profits can be managed by the owner to be reinvested back into the business or kept as income.
For more information on understanding which business structure is right for you check out the Ultimate Business Law Guide' Choosing the Right Business Structure.
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