A strategy to take money out of your corporation

Published by on

This is a problem I am approached about more and more frequently. Maybe you've built up a business and have money trapped in the corporation. It's there, not doing a lot, and you need to figure out a way for it to do more and for you to be able to not pay a ridiculous percentage in tax. Is this even possible? In a word, yes. Here are a couple strategies that could help you make this a reality. Before I get into this though, let me stipulate that you should sit down with someone qualified before you do this on your own. You need professional advice here, and this isn't just something you can throw together on your own and expect it to function flawlessly. 

So let's say you have a business making widgets and through the years or months you have managed to pay yourself and build up some money there. To keep the math easy, we'll say you have $1MM sitting in a bank account. First things first, you might want to avoid investing this in stocks or things like that for a couple reasons. Most crucial though are the tax rates on passive income. So you have a business making widgets and if you earn money here on your investments it's considered passive. This means that your tax rate is much higher for this income than it is for the standard business earnings, and that is a situation you are likely best to try to avoid.   

There are methods we can use so that you have your investments, and they make money for you, but  you don't get a tax slip at the end of the year. That means you don't have to worry about paying income tax on passive income, because its growing and accumulating that growth instead. That defers that tax payable for years, and frankly the best time to pay tax is later! 

In our scenario though, we want to have that take place, but at the same time we want to move money from the account where it is invested to our own personal income each year. So here is a way that you can make that happen, and a little flowchart for his this all comes together.    



There are a few things to note here. First of all, we aren't talking about specific investments at this point, just a strategy for how to make this work. That being said, there is an important note here. This works well because there is no income distributed in the form of interest or dividends; the only gain here is capital gains. It's beyond the scope of this post, but there are ways to invest to make sure that is the case!  It’s an important point here though to preserve the tax efficiency. Investing in this way you won't receive a tax slip every year for the investments, and that is a major consideration in making sure that this is structured effectively.