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When you open a new business, a lot of money goes out for start-up expenses that you attempt to replace with revenue coming in. While we may all dream of paying ourselves high salaries from the start, this is typically unwise when the company is in its infancy. An entrepreneur needs to examine many relevant factors to determine when and how much they should pay themselves to optimize their company and themselves for success.

Taxes

A major expense to consider is the government’s reach into the business in the form of taxes. Many factors determine exactly how much your company and you, as an employee for that company, will be taxed. The goal is to optimize both your personal income and your company’s income to practice tax avoidance. Healthy reminder: tax avoidance is legal and can put yourself at a tax advantage while tax evasion is illegal.

Not understanding how your business entity will be taxed before deciding when and how to pay yourself can set you up for a huge surprise at tax time. Some businesses pay their own taxes, other’s do not, instead the income from the business passes through to the owner(s) individual tax returns. Some businesses expose the owner(s) to a 15.3% self-employment tax, others do not.

Do you know how your business is taxed? Do you understand the individual implications of how your business is taxed?

Pay Yourself as Early as Possible

I am a firm believer in business owners paying themselves something as quickly as possible. The amount doesn’t have to be large initially, but it should certainly be something. Depending on your business entity type, a reasonable salary might even be required.

All new businesses have a revenue, cash and sales problem when they start out. Growing sales immediately is the first real challenge, having yourself on the payroll gives you a regularly scheduled expense that you have to work to meet. You better get used to it – being successful in business is largely about fulfilling obligations.

There are stories out there about entrepreneurs who went XXX years without paying themselves a red cent, well good for them. I have seen plenty of cases you won’t hear about where a business owner didn’t take care of their personal financial responsibilities in the name of ‘growing the business’ – the result in almost all cases was loss of business. If you have revenues coming in, then you should be able to pay yourself something.

Pay Yourself a Living Wage

When you open a new business, it is important to keep in mind that you keep reinvesting money into the company. Once your company starts producing revenue, allocate a percentage of your revenues to owner pay. Keeping money consistently flowing into the company is essential to the growth of a company.

What is important is that you pay yourself enough that you can meet your living expenses. You may want to make more frugal choices to reduce your living expenses early in a business, but not paying yourself at all and draining your savings is a scary way to live.

Making some obvious sacrifices such as forgoing eating out and other luxuries would be wise in the event you are going to or have recently started a business. Putting yourself in a position where you cannot meet your personal financial obligations is typically not recommended. I haven’t met many people who can operate at a high level professionally while under the thumb of individual financial failure.

Conclusion

The most important idea that you should take from this article is to consider what is best for your company AND your household. You have to look after both if you want a successful business that withstands the pressures of the first 2-3 years.



Optimizing your company and personal finances to give yourself a tax advantage, paying yourself regularly, and paying yourself enough that you meet your standard living expenses puts you in a better position to run the company effectively. Give your company and yourself the best opportunity to survive your ramp up period.