Running your own business is an exciting adventure, but it also comes with unique financial challenges. One of the biggest questions you’ll face: when do you start paying yourself? The urge to reinvest every penny into growth is strong, but neglecting your own financial well-being can be detrimental to both you and your business.

In this article, you’d learn the importance of paying yourself as a business owner, the factors to consider when determining your compensation, and strategies to find the sweet spot that fuels your success and your personal security.

When Should Business Owners Pay Themselves?

So, when is the right time to start taking a salary?

There’s no one-size-fits-all answer. The ideal compensation level depends on several factors, including your business’s financial health, your personal financial needs, and your long-term goals. Here are some key considerations:

• Profitability: Don’t put the cart before the horse. Ensure your business is generating enough revenue to cover all operating expenses comfortably before taking a regular salary. This ensures you have a sustainable income stream and avoids jeopardizing the business’s growth.
• Living Expenses: While reinvestment is crucial, you also have personal financial obligations to meet. Taking a modest, sustainable salary to cover basic living expenses can be vital, especially in the initial stages. This ensures you can continue dedicating your energy to making the business a success.
• Growth Goals: Consider your vision for the future. Do you plan on rapid expansion, requiring significant reinvestment? Or are you aiming for a slower, more stable growth trajectory? Factoring in these goals will help you determine a compensation level that allows for both personal security and business development.

Pay Yourself By Your Business Type

Every business owner deserves a fair paycheck! But how you structure your compensation depends heavily on the legal structure of your business. Here’s a breakdown of common business types and how you can pay yourself:

Sole Proprietorship & Single-Member LLC:

• Simplicity reigns: For these structures, you and the business are one. There’s no formal salary process. You can take “owner’s draws” – essentially transferring funds from the business account to your personal account when needed.
• Tax considerations: Remember, all business profit is considered your personal income for tax purposes. Keep good records to avoid mixing personal and business finances.

Multi-Member LLC:

• Member options: Here, members can choose to be paid as employees or take owner’s draws. If acting as employees, a regular salary with payroll taxes withheld is recommended. Owner’s draws offer more flexibility but require self-employment tax payments.

Corporations:

• Salary & dividends: This is the most structured approach. Corporation owners can pay themselves a regular salary like any employee, with payroll taxes withheld. Additionally, they can receive “dividends” – a share of the corporation’s profits distributed to shareholders (owners). Dividends are not subject to payroll taxes but are taxed when received.

Beyond the Basics:

• Hybrid approach: Many businesses, especially LLCs, use a combination of salary and owner’s draws. This allows for a consistent income stream (salary) with the flexibility of owner’s draws when needed.
• Tax implications: Consult a tax advisor to understand the tax implications of each payment method for your specific business type and income level.

Strategies For Paying Yourself

Finding the sweet spot between personal needs and business growth can be challenging. Here are some strategies to navigate this balancing act:

• Start Small, Scale Gradually: Begin with a modest salary and increase it as your business becomes more profitable. This allows you to reinvest while meeting your basic needs.
• Owner’s Draw vs. Salary: Depending on your business structure, an “owner’s draw” might be an option. This allows you to withdraw funds from the business account as needed, offering flexibility but requiring self-employment tax considerations. Consult a tax advisor to determine the best approach for your situation.
• Seek Professional Help: A tax advisor or financial planner can provide valuable guidance on structuring your compensation, managing taxes, and planning for long-term financial security.

What does an owner’s draw mean?

An owner’s draw is when a business owner takes money out of their company for personal use. This could be transferring funds from the business’s accounts to the owner’s personal account. It’s something that sole proprietors or partners in a partnership often do to access their share of the business’s profits or to cover personal expenses.Normally, bigger companies pay their owners a salary, but the owner of a small business might not do that. So, they take an owner’s draw instead.

What’s an owner’s salary?

An owner’s salary is the regular payment a business owner gives themselves for their work in the company. It’s like the salary earned by an employee, but in this case, the owner is paying themselves for their role in the business. How much they pay themselves usually depends on things like what they do for the business, what’s typical in their industry, and how well the business is doing financially.

In Conclusion

Making sustainable compensation a priority will help you focus on your own well-being, which will help you make wise decisions, control stress, and guide your company toward long-term success. Recall that a healthy you correlates with a healthy business. Reward yourself appropriately, and you’ll see the success of your business endeavors.