The average person calculates their pay by looking at their salary minus taxes. Those looking into business ownership may even project a wage for themselves based on what they make at their current job. These equations leave out a critical aspect of business ownership: owner benefits (OB).
OB is represented as the seller's discretionary cash or can also be viewed as the businesses profit.
An employee sees: Salary - Taxes = Pay
A business owner sees: Gross Income - Expenses = Profit.
OB applies mainly to franchise owners in 3 ways:
1. The owner can legally pass a number of personal expenses through the business such as child care, vehicles, health coverage, travel expenses, and many other expenses as long as there is a business purpose associated with the expense. Being self-employed often means you incur risks and costs that employees don't have to worry about.
The Internal Revenue Service is generous when it comes to tax deductions for small businesses to soften the blow of these added costs. As a general rule, your company can write off any ordinary and necessary incurred expense.
2. Business owners can aggressively contribute to retirement plans. Some 401(k) providers are actively targeting small businesses these days. In August, Capital One, for example, launched Spark 401k, providing low-cost, all-ETF 401(k) plans for businesses with fewer than 100 employees. Spark offers access to retirement planning experts, too.
Many small business owners think they don't have enough employees to provide a 401(k) plan, but any size company, even an owner-operator business, can have a 401(k) plan. As a business owner, you also can contribute far more to your retirement plan than you can as an employee. As the employer, you can put up to $53,000 into your retirement account in combined contributions each year.
3. As a business owner, you can take money from the company as a distribution, dividend, or draw instead of a salary. This is entirely legal as long as you abide by generally accepted accounting principles.
The government sees the multiple benefits of people becoming business owners and wants to encourage more people to do so. Providing these advantages to business owners, in the way of preferential tax treatment, is a way to promote business ownership.There are advantages when it comes to income as a business owner that you can't get as an employee. Our team at Caring Senior Service is familiar with the ins and outs of owner benefits and can help you look at the big picture of small business ownership. Schedule a call with our Franchise Sales Team to learn more.