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Dave Ramsey says: Any business needs retained earnings

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Dear Dave,

My husband owns a small landscaping and masonry company. His profits over the last couple of years have been about $80,000 annually. We were wondering if we should be setting aside some retained earnings.

— Kim

Dear Kim,

Yes, all businesses should have retained earnings. In the personal finance world, we would call that an emergency fund. It can be difficult in the business world sometimes, though.

You’re talking about running a business, making a profit, feeding your family, and saving money in the business. This isn’t an easy process no matter how long you’ve been in business.

One way to solve the problem, though, is to take a percentage of your profits at the end of the month and set it aside for retained earnings first.

Do this before you take any profits home or distribute them under a profit sharing plan.

It doesn’t have to be a big percentage, but you should be setting money aside every month for the company.

The beauty of doing this is you’ll have money sitting there to replace equipment and other expenditures down the road.

Just remember that it’s all taxable. Whether you’re in an LLC, Sub S Corp or sole proprietorship, any money you make as profit — whether you take it home or not — is taxable. So your retained earnings may be saved, but they will be reduced by the taxes on it each year.

Anything you do in business requires money, and to avoid going into debt you’re going to need retained earnings.

Good question, Kim!

— Dave

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