How does each business owner in a partnership pay themselves if they have different roles?

Answer 1

It starts with how the business is organized...if it is a sole proprietorship or a corporation.

In a sole proprietorship, the business and the owner have no distinction from each other...hence any money brought in or any taken out are all done as the owner. he can simply take what he wants at any time to do with as he pleases, which includes paying himself, just like any other bill. Everything that is happening in the business is reported under the owners ID and tax return (as part of a Scheduule C of that return). All money he brings in is taxable to him, however all (within guidelines) expenses are deductions to that income. The owner is "self-employed", and any money he makes in the business is taxable to him, and he pays FICA at the self employed rate (keaning he pays the extra 7.65% a business must pay for it's employees).

In a Corporation, the owner owns the stock of the business and he is employed by it...he can take a salary from it...in any form (set, draw, etc), and the corporation - which files it's own tax return - has that payroll expense as a deduction. If the corporation makes money (or has the ability even out of "retained earnings' or returning contributions to capital (the start up $ that were provided by selling it''s stock (to the owner))..it can pay a dividend to its shareholders. Dividends are paid with AFTER TAX (that is after the corporation pays taxes) money. There are guidelines for how much salary is deductible and allowed, because games can be played where an owner/employee of a Co would prefer to pay himself a high salary (a corp tax deduction...and corporate tax rates are normally much higher than personal), to take the money out of the company (a deduction) - rather than paying himself a dividend at the low rate but not deductible. The IRS then says that part of the salary was actually a "deemed dividend".

Basically, one needs to distinguish their positions...in one case say you are a partner in a partnership...an INVESTOR...and what you ultimately invest or get as a return is because of that...it makes no difference if you work for the Partnership or the comapny...your investment in it is what makes you a partner/owner and determines your right to receive from it. You may also work for the organization...Partnership, Corporation, what have you....and as an employee you are paid a salary for thejob you do...presumably more for say being a skilled engineer and less if your cleaning the office. That salary is an expense to the Partnership...like any other expense...and reduces the amount of income it may have to distribute to it's investors. For example, an employee at a GM plant, gets the same salar whether he is an owner (of stock) or not. And that salary may well be the same or different than anyone else in the Co.

Clearly, the most problematic thing for many small business owners is running the business so there actually is money to be paid out to them either way.