Do Small Business Owners Make Too Much?

Out Of Debt

Out Of Debt (Photo credit: Garrettc)

 

Chris is a small business owner with a question – Should I be able to take home $400,000?  If I have a $400k profit reported as income, is that unfair?

A short history of Chris’ business over the last 4 years

  • 2008 – Lost 3 of my top 5 largest customers.  Reported major losses in earnings
  • 2009 – I had to do layoffs for the first time ever as the losses continued to pile up.  I took no paycheck, no income.
  • 2010 – We pretty much finished at break even.  Even so, I took no paycheck and had to dip into 401K to cover expenses because we exhausted our line of credit and banks wouldn’t lend.  The bank’s position was that despite over 10 years of operations, we had depleted all our assets, meaning our cash, and had shown losses for 2 years.  Even though orders were coming in, we weren’t a “safe bet” in their minds
  • 2011 – We are making money again, and will make a nice profit, but are in such a hole from a cash flow standpoint that we were starving for cash due to some of the large orders. I depleted the rest of my 401K to keep afloat and purchase materials.

If Chris’ company shows $400,000 in earning 2011 does that make Chris one of those greedy owners who should “share a little more”?

Given that Chris went 2 years without a paycheck, and depleted his retirement savings, I can’t imagine anyone would have an issue with him taking those earnings, right?

Ok then, what if in 2012 the opportunity arises to make $400,000 again?

Chris’ argument is that there needs to be enough “working capital”, especially with business coming back and growing, to cover operating expenses.  The explanation is that the company lays out money for the materials and the costs of wages to make the goods 2 or 3 months before payment is actually received for the products.  And, especially after the lessons of 2008-2010, companies should make sure they keep a solid “rainy day fund” to cover things like economic slowdowns, plus there is equipment that needs replaced or upgraded.

President Obama and his administration and followers feel that companies like Chris’ should have to “share a little more”.  How much more?  Well, some have gone so far as to say profits should be banned!  In that case, I suppose, owners like Chris should just get a paycheck like any other employee of the business, even though they will be expected to front the money for startups, put in the hours and oversee the business as it grows.   But the current administration doesn’t see any issue with that.

“From each according to their abilities, to each according to their needs.”

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