How to Pay Yourself as a Business Owner

One of the most common questions I get from readers is how to pay themselves as a business owner. It’s a great question and one that deserves a detailed answer. After all, paying yourself is one of the most important aspects of being a business owner. Get it wrong, and you could find yourself in financial trouble. Get it right, and you’ll be on your way to a prosperous future.

There are two main ways to take money out of your business – through a salary or an owner’s draw.

Salary – If you are in business, it is important to pay yourself as an employee of your company. This ensures that taxes will be withheld from every paycheck just like if they were working for someone else and the IRS has a “reasonable compensation requirement” which means this practice should follow what others doing similar jobs get paid around them.

Owner’s draw – You have the option of drawing money from your business’s profits on an as-needed basis. This can be done up to what you put into the company, which is called owner’s equity. It might make more sense for this portion of income or resources to be set aside regularly so they’re available when needed without having too much uncertainty surrounding them due to tax bills.

When deciding how much to pay yourself, it’s important to consider average salaries for entrepreneurs. Ultimately, the goal is to make sure all operational expenses are taken care of before you take any money for yourself.

So, how do you pay yourself as a business owner? The answer to that question depends on your business’s structure, stage of growth, and personal finances.

  1. Business Structure – The first factor to consider when paying yourself as a business owner is your business’s structure. Are you a sole proprietor? A partnership? A limited liability company (LLC)? Each type of business has different rules when it comes to paying yourself. For example, sole proprietorships technically don’t have to pay themselves, because they are one and the same. The money the business makes is the money the sole proprietor makes. Partnerships are similar in that partners can just take money out of the business whenever they need or want to. LLCs are a bit more complicated because LLC owners are considered employees of the LLC. This means that they have to pay themselves a salary, just like any other employee. The salary can be whatever the LLC owners agree upon, but it must be reasonable given the duties performed and skills required.
  2. Growth Stage – The next factor to consider is your business’s growth stage. Are you in the startup phase? The growth phase? The mature phase? Your business’s growth stage will influence how much you can and should pay yourself as its owner. For example, if you’re in the startup phase, you probably won’t be able to pay yourself very much, if anything at all. This is because startups typically don’t have much revenue coming in, so there’s not much money to go around. On the other hand, if you’re in the growth or mature phases, you’ll likely be able to pay yourself more because your business will have more revenue coming in.
  3. Personal Finances – The final factor to consider is your personal finances. Do you have other sources of income? Do you have debt? Your personal finances will play a role in how much you can afford to pay yourself from your business’s earnings. If you have other sources of income, such as a spouse’s salary or investments, you may be able to afford to take less from your business. On the other hand, if you have high levels of debt, you may need to take more from your business in order to make ends meet.

Paying yourself as a business owner is an important part of financial planning—but there’s no one-size-fits-all answer. The best way to approach it is by taking into consideration your business structure, stage of growth, and personal finances. With that information in hand, you can decide whether a salary or an owner’s draw makes more sense for you—and set up a payment plan that works for both you and your business.

If you’re looking for more information about paying yourself as a business owner or want help setting up a system that works for you, BOOK A FREE CLARITY CALL with me today!

Bookkeeping, Budget, Small Business

September 26, 2022

Prudence Rufus