Running a Shop
Or a serious business?
A long time ago I was a cashier at a store. One of my duties was to give the owner's son $2,000 COP for lunch money every day from the cash register. He had to replace it with a note saying that the money was taken for that purpose.
What happened at the end of the month or at the end of the year with the accounting of that money? I don’t know. Possibly the owner replenished it or entered it as a "miscellaneous" expense. In any case, I always thought this was rather strange. In the best of situations it made me think that this company was run like a mom-and-pop shop.
During my work supporting various companies and my own experience as an entrepreneur, I’ve identified two main groups of entrepreneurs:
The Shopkeepers, where there are only one or two partners who work most of the time in the company.And the
Meticulous Managers. These are the ones who have three or more main partners, plus external partners who don’t work at the company.
This arbitrary classification makes it possible to group outright divergent behaviors in cash management, accounting and, consequently, taxes.
Shopkeepers tend to record all sorts of personal expenses as company expenses, such as: lunches outside the business, transport for activities not related to corporate purpose, salary of non-working relatives, vehicle credits or properties that are not related to commercial activity.
In general, sole owners of a business who in turn work for their own company, consider it redundant or unnecessary to pay themselves wages and then pay their personal expenses from them.
Meticulous Managers, on the other hand, have a defined salary or payment of fees that is paid on a fixed month-to-month basis. They rigorously separate personal expenses from those of the company. They pay said expenses from their own salary, and gradually develop expense reimbursement policies that become increasingly strict (budget ceilings, associated payments - taxes, deductions, social security, etc.).
I guess these people aren’t meticulous as a rule, but because they have to be. As many partners work, very likely only one or two have the authority to spend company money, and they can’t set a bad example for others. Additionally, if there are external and/or minority partners, they’re forced to act more transparently so that they don’t affect their partner’s assets.
Using company money for personal expenses is not merely a distinction that sets one group apart from the other: it’s morally reprehensible behavior, a violation of the law. That’s not the proper way to do things.
In the Colombian Tax Code, Article 107, it’s indicated that expenses that are deductible from income must comply, among many others [1,2,4,5,6], with three basic principles [3]:
Causality: The expenditure must be related to the income-producing activity [6],
Necessity: The expenditure must be indispensable according to the commercial customs of the income-producing activity,
Proportionality: Expenditure must be reasonably proportionate to the income or the potential revenue-generating income.
In this sense, and in order to fully comply with the law, collecting receipts from a cousin’s gas tank or the lunch bill of a third party outside the company and incorporating them as a company expense is a violation of the principle of causality.
Paying interest on personal property such as vehicles or homes, without this having anything to do with the corporate purpose of the business, also violates the principle of necessity.
Likewise, paying the manager’s aunt and uncle the same amount as the manager when they don’t even work for the company, is a disproportion according to the commercial customs of any sector.
These are all gimmicks used by unscrupulous accountants and tax reviewers to reduce taxes, but that go against good conduct and defined laws.
This situation then leads us to answer the following question: if I am the legal representative, general manager, and full owner of my company where I work all the time, why can’t I record my family’s groceries as a company expense?
The answer is simple: because you created a company that’s a legal entity independent of the natural person, and that is subject to different laws indicating tax principles that must be treated with the utmost respect.
Obviously if you want to have a mom-and-pop shop, a small, disorganized business that you’ll never be able to sell in the future, you can disobey the law and never even be found out. Now that you know that, if you keep doing it, you’ll just be a sneaky corporate fox.
If, on the other hand, you want to change these behaviors and be an exemplary entrepreneur, then you have to pay the price of doing things right.
Give yourself a salary. It doesn’t matter how much—that’s a capacity issue and not a legal one. Apply the corresponding withholdings, pay the required social benefits, and by doing that, your salary will be tax-deductible. It’s causal, necessary and, I hope, proportional. You can sleep peacefully knowing you’re not stealing from the State. You’ll be running a business, not a shop.
Formal requirements for costs and expenses to be deductible.
National Tax Code – Article 107 – Necessary expenses are deductible.
National Tax Code – Article 618 – Obligation to demand an invoice.
National Tax Code – Article 617 – Requirements of the sales invoice.
Deductions must be causally related to income-producing activity, not income.