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As an owner you still want money to spend. How do you get that if not from the profits? In the cable company example, from taxes (not paid) and accelerated dep
by gvb 4y ago
As an owner you still want money to spend. How do you get that if not from the profits?
In the cable company example, from taxes (not paid) and accelerated depreciation (a big part of the taxes not paid). Money is fungible and cash is the ultimately fungible form of money. Tax money (not paid) is better than money taken as taxed profits.
By running the business at a loss (from a profit/loss point of view), the cable company paid little or no taxes. You can take $100 in profit and pay $30 in taxes (net $70 in your pocket), or you can show $0 profit and roll that $130 into your business expecting $130 + growth in the future. Note that, with the cable company example, the cable company "was unprofitable" every year yet paid a compound return of 30% to its shareholders.
- wodenokoto 4y agoSure. But if I roll all revenues into the business where are the money to pay my personal rent and groceries as the owner?
- dmurray 4y agoYou pay yourself a salary. That's the business investing revenue back into its employees. And yes, you'll pay income tax on that, but that may only be a small part of the value you've created. Or you sell some shares, or borrow against your equity. Perhaps you can roll it forward indefinitely and you're in a jurisdiction where your heirs get favorable tax treatment by inheriting the business.
- biorach 4y agoYou pay yourself a salary. The whole setup probably requires operating at a much larger scale than that of a sole trader or small family business.
- deleted 4y ago[deleted]