In the business world, terms such as "pro-labore" and "profit distribution" are often used, but not always fully understood.

Both are forms of remuneration for partners and shareholders, but have different characteristics, purposes and tax implications.

Understanding the difference between these two concepts is essential for the correct financial and fiscal management of a company.

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In this article, we will explore in detail the differences between pro-labore and profit distribution, their characteristics, how they are calculated and the tax implications of each.

1) What is Pro-Labore?

Pro-labore is the remuneration paid to the partner or shareholder who performs administrative or management duties in the company, which is equivalent to a salary.

Unlike a regular salary, however, pro-labore is not mandatory for all partners, but rather for those who actually work in the company, performing operational or management activities.

Legal Nature: Pro-labore is considered remuneration for work done in the company, similar to an employee's salary.
Mandatory: The payment of pro-labore is mandatory for partners who work in the company's administration, and social security contributions (INSS) must be paid.
Calculation Basis: The amount of the pro-labore is determined by the company, taking into account the partner's role and responsibilities, and must be compatible with the market and the activities carried out.
Incident taxes: Pro-labore is subject to withholding income tax (IRRF), social security contributions (INSS) and, in some cases, FGTS.

2) What is profit distribution?

Distribution of profits is the part of the company's net profit that is distributed to the partners or shareholders as a return on invested capital.

The distribution of profits can take place periodically, as defined in the company's articles of association or at shareholders' meetings, and is tax-free for the beneficiary, as long as it is done in accordance with the rules established in current legislation.

Legal Nature: The distribution of profits is remuneration for the capital invested in the company and is not directly linked to the work or management of the company.
Mandatory: It is not compulsory. Profits are distributed according to the decision of the shareholders and the company's financial availability.
Calculation Basis: The amount distributed is based on the company's net profit, calculated after deducting all expenses, taxes and contributions.
Incident taxes: As long as the distribution is made in accordance with tax rules, it is exempt from income tax for the shareholder, which makes it an attractive form of remuneration.

3.Main differences between pro-labore and profit distribution

Purpose:

Pro-Labore: Remunerates the work of the partner who manages the company.
Distribution of Profits: It remunerates the capital invested by the partner or shareholder, regardless of their involvement in management.

Tax Imposition:

Pro-Labore: It is subject to INSS, IRRF and, possibly, FGTS.
Distribution of Profits: As long as it is done within the rules, it is exempt from income tax and social security contributions.

Frequency:

Pro-Labore: It is usually paid monthly, like a salary.
Distribution of Profits: This can be done periodically, such as quarterly, half-yearly or annually, as defined in the articles of association.

Calculation:

Pro-Labore: Based on the partner's role and responsibilities in the company, and must be compatible with the market.
Distribution of Profits: Based on the company's net profit after closing the balance sheet.

4. tax and legal implications

Pro-Labore:

Social Security Contribution: The partner who receives pro-labore must contribute to the INSS, and the company must pay this contribution.
IRRF: Income tax is withheld at source from the amount of the pro-labore and is paid by the company directly to the IRS.
FGTS: In some situations, especially for companies opting for Simples Nacional, it may be necessary to pay the FGTS.

Distribution of Profits:

Tax exemption: As long as the distribution is made according to the profit calculated in the accounts and in accordance with tax rules, it is exempt from income tax for the shareholder.
Accounting proof: The company must keep rigorous accounts to prove the calculation of profits and ensure tax exemption.

How do you define pro bono in your company?

Defining the amount of the pro-labore can be a delicate task, as it must be in line with the market, the partner's responsibilities and the company's financial health. Here are some important considerations:

Market Analysis: Research the market values for functions equivalent to those performed by the partner in the company.
The company's financial capacity: Assess the company's payment capacity to ensure that the amount of the pro-labour does not compromise cash flow.
Professional Council: Consider hiring an accountant or financial advisor to help you determine the most appropriate and strategic amount for pro bono.

Profit distribution: strategies and best practices

In order to distribute profits efficiently and safely, it is essential to follow good accounting and tax practices:

Accurate accounting:

Balance sheet: The distribution of profits must be based on a well-structured balance sheet that reflects the company's real financial situation.
Profit reserve: Before distributing profits, consider creating profit reserves to guarantee the company's financial health in periods of lower turnover.

Distribution Planning:

Frequency: Define the frequency of distributions (annual, half-yearly, quarterly) and follow this routine to maintain financial predictability.
Documentation: Formalize profit distribution decisions in meeting minutes, specifying the amounts, beneficiaries and payment dates.

Tax consultancy:

Accounting advice: Relying on an accountant or tax advisor is crucial to ensure that all distributions comply with the law and to take advantage of the tax benefits available.

To find out more about pro-labore and profit distribution, clarify other doubts and make more assertive choices for you and your business, count on the team of specialists at CLM Controller.

As a modern, digital accounting firm, we serve companies in all parts of the country, always bringing the best in accounting services to our clients.

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What is the difference between pro-labore and profit distribution?