Profit Share with a CC between two members

[FanAnn]

Hi All,

I am a new member and am needing some advice on the profit sharing for a CC.

There are two members for this CC - 40% and 60% respectively.

The 40% Member has been paid a salary for this last financial year
The 60% Member has been paid nothing this last financial year.

The profit is currently R580k before tax - after tax R417600.00 (28%)

Do we declare a dividend on the R417600 amount? R83520.00 (20%) = R334k

Does the salary the 40% member drew during the year (R200k) be added back onto the profit before working out the profit share? IE R334k plus R200K = R534K

Therefore:

R534K / 60% = R320k due to the 60% member
R534K / 40% = R213 - R200k salary paid during the year = R13k due to the 40% member

Do these amounts due to the members also attract income tax when paid to the them?

As the 60% member is due a large amount - can he take this money on a monthly basis in the 2018-2019 tax year as a salary (if he must pay tax ) so that it doesn't create a cashflow problem?

Will the profit split be allocated against both loan accounts and the monthly Salary taken by the 60% member be posted against his loan account?

Apologies for all the questions but would appreciate any feedback or advice given as I am getting my knickers in a knot! Our accountant does our books privately after hours and therefore responses from her are slow and the end of the financial year is looming!!

[Dave A]

Does the salary the 40% member drew during the year (R200k) be added back onto the profit before working out the profit share? IE R334k plus R200K = R534K

Why was one member paid a salary and not the other?
e.g. Was it because one was actively employed and working full time in the business while the other is an investor and not active in the business on a full time basis?

[Greig Whitton]

Do we declare a dividend on the R417600 amount?

Yes.

Does the salary the 40% member drew during the year (R200k) be added back onto the profit before working out the profit share? IE R334k plus R200K = R534K

No.

Do these amounts due to the members also attract income tax when paid to the them?

No.

As the 60% member is due a large amount - can he take this money on a monthly basis in the 2018-2019 tax year as a salary (if he must pay tax ) so that it doesn't create a cashflow problem?

Yes, but then it would be a salary increase, not a dividend (i.e. dividends wouldn't be declared and the after-tax profit would be retained to fund the salary increase).

Will the profit split be allocated against both loan accounts and the monthly Salary taken by the 60% member be posted against his loan account?

No, dividends and salaries are not loan repayments.

[Andromeda]

The CC is required to withhold 20% and to pay it to SARS, while the net dividend gets paid to the members. Then as Greig says, the members pay no further tax thereon.

Actually you need to carefully consider the whole issue:
1. As Dave asked, why did only 1 member receive a salary. Either it is correct, or member #2 must get a salary also, or the salary is a pre-payment of profit. Once you have dealt with that issue you might have a revised net profit.
2. You are not required to distribute the entire net profit. The dividend can be any amount or nothing. The cc must however, after payment of whatever dividend is decided, be in a position to pay all of it's debts as and when they fall due. You allude to a possible cash flow problem; the Act prohibits a dividend from being the cause thereof.
3. Any dividend (or any other payment made to them because they are members) must be made in the same ratio as their contributions, 60/40

[FanAnn]

Why was one member paid a salary and not the other?
e.g. Was it because one was actively employed and working full time in the business while the other is an investor and not active in the business on a full time basis?

Yes, the 40% member worked full time for the CC and the 60% member is not active in the business other than offering advice and guidance.