Module 6

Tax, reserves, drawings and profit-sharing: what happens to the profit

When a firm makes a profit, the question of what to do with it is almost as important as making it, and much more likely to cause quarrels. Part belongs to the tax authority and must be put aside before anyone thinks of spending it. Part must stay in the firm as a reserve and as capital for growth. Only then is anything left for the owners, who may disagree about how to share it. Many firms get into trouble by paying out too much, too soon, in drawings that follow the owners’ spending and not the firm’s cash; by forgetting that tax is a liability that grows with every pound received; or by adopting a profit-sharing system that rewards the wrong behaviour and drives away the people who matter. This module sets out the principles, in plain terms, and without any attempt to give tax advice: your accountant must do that.

General education on law-firm finance, using invented firms and figures. It is not accounting, tax, financial or legal advice. Rules on accounting, tax, client money, insurance and fees differ between countries and change: take advice from a qualified accountant and check your regulator’s current rules.