A:

A company is a commercial organisation (usually incorporated but with or without limited liability) which pays salaries to the staff including shareholders/owners, which is recognised for tax, labour law purposes, and generally. It is a separate legal body from the individuals that makeup the company. If this is not the case then it will be classified as a “physical person”. A physical person is normally someone who has a business in his own name (in some cases including partnerships – but this may depend on State law) and who receives no specific remuneration for his work/time, but rather receives all the profits (or a percentage, in the case of a partnership). Where the State recognises the “physical person” as receiving a taxable salary and then the balance as division of profits, the situation will be different – we suspect that these cases will be very rare, if they exist in any Country at all.

As a physical person, the owners profit is not an expense and he must use AC. We do not understand how a physical person can be classified as an SME for cost model purposes.

A private (incorporated) company paying the owner a commercial salary (not division of profits) can be an SME and the normal rules of FC and FCF calculations apply.

We have suggested in the past that a physical person should be allowed to calculate a notional salary per hour and use FCF, but we are not aware of any project officer who has agreed to this (it is really contrary to the original intention – even if that was unfair). We have suggested that the average of the profits of the business for past 3 years divided by the average productive hours for that period (hopefully 1,680 hours or close to that) be used to make this calculation.