CASE STUDY - How should you pay yourself?

A lot of new business owners struggle to understand how they should pay themselves when they start up in business. Most owners used to work on a PAYE salary or wage prior to starting out on their own. Most have heard that they can also pay themselves drawings from the business.

Solution
Both methods are fine but each has advantages over the other. There are pros and cons of each method and there is no right way.  Making a decision on how you are going to pay yourself is very important. We have all heard how someone built up a business from scratch and put everything they earned straight back into the business. The problem with that approach is that if the business fails, the business owner may walk away with nothing to show for all their hard work. As soon as you are receiving reliable income and you are covering your expenses (including your tax liabilities) you should think about paying yourself regularly.

The Outcome
By electing to take drawings, a business owner was able to manage their cashflow better. Their business was seasonal so had some months of high earnings where other months were more modest. They planned to take drawings in the good months and plan accordingly. Because their business was starting up they also avoided paying more tax than they might have on PAYE in the first couple of years.

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CASE STUDY - How should you close a solvent business down correctly?

Most businesses have a life cycle. Some are not as successful as others. Some grow rapidly and merge with others or are sold. It’s very common for companies to cease trading at some stage of the business cycle. 

Solution
There are two ways to close down a business – the right way and the wrong way. The wrong way is to do nothing. By ignoring requests to file an annual return with the Companies Office eventually, the company will be struck off. This seems easy but provides the directors with no assurance that the company might be restored at a later date by a creditor or the IRD. The right way is to write to the IRD and the Companies Office and follow the process to close the company for good.

The Outcome
A business owner elected to use the wrong way. They thought that because their company had been struck off by the Companies Office that they could walk away from some tax liabilities. The IRD had other plans and had the company reinstated by the Companies Office to pursue some tax debt. This also meant penalties and interest were charged. The owner could have avoided this by writing to the IRD to seek their agreement for the company to be closed down. Any tax debts would have been dealt with at the time and any penalties, interest or potential prosecution avoided. 

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CASE STUDY - How should you go about funding your business?

All businesses struggle with the vexed issue of funding, especially in the start-up phase. Nearly all business start with the owner's funds but as the company grows there is always the need for more capital.

Solution
There are two sources of funding – debt or equity. Once your own resources are exhausted you have to choose one or the other – or possibly both. Debt funding usually involves mortgaging a residential property or giving a personal guarantee. This means that if the business fails the owner may stand to lose more than just the company. The other option is equity – selling down your shares in the company usually in return for cash. This means sharing the risks and rewards with other investors. It also means diluting the profits in the good times.

The Outcome
A business owner decided to sell down her ownership in the company by selling a proportion of her shares to an investor. She did this because she was already fully committed with her residential mortgage and unwilling to take on any more debt. She took the time to find the right person. She didn’t want a passive investment. She wanted a fellow shareholder who was prepared to roll up her sleeves and could help in areas where the owner thought she was weak. Over a period of time, the owner was able to attract an investor who had great skills in administration and back office functions, freeing her up to concentrate on her key strengths of sales and marketing. The business has continued to grow from strength to strength. 

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