Nothing is more rewarding than seeing your business achieve the peak of its success. After all the sleepless nights and uncompensated overtimes, all the manual labour, time, and effort you have put in are now coming to fruition. As many entrepreneurs know, owning a business is not nearly as glamorous as what other people think. They might control their schedule and be the boss of themselves; but, their days do not always end with a hefty paycheck in hand. In this context, we will be tackling the salary of business owners. How much to pay yourself?
According to American Express, the average salary of a small business entrepreneur is roughly $68,000. However, most entrepreneurs know that this is far from the truth. Entrepreneurs work harder and better than most of their employees. But when it comes to salaries, they are often reluctant to reward themselves with the compensation they deserve. Even more surprising is the fact that 30 per cent of start-up enterprise owners do not take a salary.
Many have dreamt of the idea of setting your salary. But the business industry is a complicated venture, and everything depends on certain factors. In the case of your salary, it depends on the type of your business, industry and condition, the company’s maturity, and how much you want to earn. Until then you can conclude the salary of business owners.
Here are a few guidelines to start setting up your salary of business owners.
1. Separate your Personal Finances
For start-ups, it is easy to mix up your personal and business expenses during their early days. However, it is best to separate them gradually as the company progresses. Keeping things separated allows you to track and record each finance and prevent accounting headaches in the future.
Start by establishing a legal identity for your small company, such as a corporation or an LLC. Aside from financial separation, a legal identity protects your business from legal problems such
as debts and lawsuits.
You can also open a company debit or credit card and start using it for all business transactions. This action draws a solid line between your personal and company finances. Also, it will allow you to build better credit scores and make you eligible for future loans.
2. Choose a compensation method
The IRS or Internal Revenue Service established a set of requirements to help you determine how and when to take monetary compensation from your organization, and it depends on the business entity you are running. For sole proprietors and single-member LLCs, the draw method should be practised. For multiple-member LLC and S corporation owners, a distribution or distributive share is implemented. Lastly, paycheck or salary method for employees and corporate executives.
- Owner’s draw method – this means that your salary will come from your company’s profits. After deducting all expenses and reviewing your profit and loss statements, you can start calculating your monetary compensation.
- Distributive share – this means that an individual partner’s share will depend upon the partnership agreement. If there is no prior agreement, then the distribution will depend on several factors such as ownership, capital contributions, and rights to partnership assets.
- Salary method – is a monthly payment based on the hours of work you have done or a fixed rate.
For the most part, the compensation amount and timing would still be up to the company’s owner.
Final Thought on Salary of Business Owners
There are a variety of factors that go into the equation when deciding how much to pay yourself. But it will ultimately end in intensive planning and calculations to determine the exact amount of your “salary of business owners”. Make sure to account for everything: operating capital, business income, expenses, taxes, and cash flows. Then determine the amount of money you need to get by and what you are worth. Balance everything out to get the best deal for both parties.
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