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What motivation does a privately owned company have to increase Net Income?

Since there is no concept of share prices (which derives its value from the Net Income - NI), why should a privately owned company, which is typically owned by a family, let's say, have NI?

Why can't the owners compensate themselves after everyone else, all expenses, taxes, etc. has been paid? NOTE: When the owners compensate themselves, this is still an *expense* in the accounting sense.

Suppose that the company has $10,000,000 in revenues; $5,000,000 in wages (but not including the wages of the owners, which is drawn from the money left after COGS, taxes, etc.), costs of goods, and depreciation; $2,000,000 in taxes. The company now has $3,000,000 in which to pay their owners. So then they pay their owners, and the accounting looks more like this:

Revenues: $10,000,000 COGS/depreciation/Wages cost: $10,000,000 NOTE: The company pays no taxes since they don't have an earnings.

From a tax-efficiency point-of-view, this is a very good idea, I would think.

Questions/Commens?

Reply to
Brablo
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The IRS will probably argue that the salary paid to the owners was way out of line and it should be declared a dividend. This will change the expenses quickly. The IRS isn't stupid.

704set
Reply to
704set

No it is a very bad idea. You had better have a good reason to provide to the IRS for EBIT wages paid to the principal owners that are primarily for offsetting revenue. In addition, the owners would have to report those wages on their own personal income taxes, even if improperly drawn. Many people mistakenly assume that they only have to file corporate income taxes when they own and derive wages from their companies.

Reply to
Rocinante

"Brablo" wrote

For some business entities this is exactly what happens (or close enough to it). PSC's are more likely to be doing this as often as possible. Not so much so with other business types, depending on the type of business. Also of great concern is cash flow. Can't pay out profits if there isn't any cash there.

As mentioned by others, executive compensation issues may become an audit issue. Most commonly found in larger companies where the profits are not tied to the owners efforts alone, and where their salary is already over the FICA cap ($100,000+/-).

Reply to
Paul Thomas

Very interesting...

I had not idea that there was a concept of a salary cap for American wage - earners. Perhaps, professional atheletes should also have a salary cap as well.

Reply to
Brablo

Brablo wrote on 12/9/07 11:28 PM:

It just doesn't get the publicity that the minimum-wage receives.......

Why don't you write to Congress & suggest this......Why should someone whose pituitary gland went wild and allowed him to drop a ball through a hoop get more than a factory worker??? You might also suggest a law where a family of four cannot own a residence exceeding 1000 sq. ft. or own a car newer than 5 years old...... It sounds like you have some great ideas.....

Reply to
Blash

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