To start your small business, you may have given up a corporate job and borrowed money from your retirement savings. Forgoing a salary in your new role may be unrealistic and can damage your personal financial plan. Yet it can be confusing to figure out what to pay yourself as your company — and your responsibilities as its owner — grow.
One of the most damaging “pearls of wisdom” espoused by some experts is that you shouldn’t pay yourself anything for a while. You should offer up sweat equity to get the business off the ground and reinvest any net profits.
The problem with this advice is that “a while” is never defined. Many small-business owners fail to compensate themselves year after year, which affects not only current income but also retirement savings. They consider it investing in their business. The danger of this strategy is that they will have a difficult time selling the business down the road. The logic: If your operation is barely scraping by while not paying its manager (you), who would want to pay you so they can step into your shoes?
Any successful business model must include payment for the company’s management. If your projected revenues do not support that, your business model is weak. Your management role should be compensated in order to ensure that you not only prosper financially, but also are not subsidizing a damaging strategic direction.
Figuring Out Your Salary
So, how much should you get paid? There are several ways to figure this out. You can determine how much money you need to live on. You can base your salary on how much profit you think you will have left after covering other expenses. The soundest approach, however, is to research how much you would have to pay someone else to take the reins as manager. If, for example, you would have to pay a manager $45,000 a year to run your business full-time, that’s a solid goal to aim for.
That doesn’t mean that you have to pay yourself from day one. If your business needs to ramp up revenue in the first year or so before it can pay a full-time manager, set a projected date by which you will start drawing a salary — and stick to it.
Paying yourself an appropriate salary to manage your business helps you meet your personal financial goals and helps your company to remain fiscally sound.