There is an excitement to running a business knowing you are the one to pay yourself as the business owner. Unlike working as an employee for a particular company, your income does not rely on how you run the show or the effort you put in. However, you have the flexibility to decide your salary as an entrepreneur. In addition, the effort you put into your own business will determine the business’s profit.
There are several advantages to being self-employed, although you are most likely to experience challenges in paying yourself as a business owner. The kind of business configuration you choose and the stage of growth of your business will determine the way you pay yourself. As an entrepreneur, there are two ways to pay yourself:
Under the salary method, you pay yourself a regular salary just like it would happen if you were employed. Paying taxes from your paycheck will also apply. This is a requirement under the constitution for structured businesses taxed as corporations. Your salary should be the same as the person working for a company doing a similar job as yours.
2. Owner’s Draw
Money is drawn according to the profit made by your business. You are not required to pay taxes when you make a draw, but it is essential to set aside money to cater to your tax bill. The owner’s draw is the sum of money or a share that a sole owner gets from a partnership for personal expenditure.
Factors Determining the Income You Get as an Entrepreneur Include:
1. Business Structure
The specific structure of your business, for instance, a partnership, will determine if you will have an income or an owner’s draw. In the case of a sole proprietorship or a partnership business structure, the owner’s draw is applied. You can take a salary if your business is a corporation. A certified public accountant can take you through the advantages of paying taxes and the requirements of your business.
2. Business Stage
Most entrepreneurs do not take money from their businesses, especially at the start of the business. It is prudent to start paying yourself immediately after your business has a good cash flow. This will assist you in factoring out money keen on the business’s operational expenses.
3. Personal Finances
The income plus the technique you use should ensure that all your requirements are covered. Such requirements include bank loans, essential expenditures, and car loans. If you are not paying yourself or your finances are weak, it would rise to a disadvantage while looking for small-business funding.
Methods of Paying Yourself as A Limited Liability Company Single Member
1. Pay Yourself as an Independent Contractor
If you have a specialized skill your business requires, you can apply it as an independent contractor for your limited liability company(LLC). For instance, you can carry out graphic design work for your business and make designs for your clients. You are paying yourself as the contractor allows your business to maintain the budget intended for it. Thus, you will be required to pay self-employment taxes on your income if you work as an independent contractor.
2. Pay yourself an Income
Paying yourself a regular wage the same as employed personnel is incredibly beneficial. The amount you pay yourself must be realistic and use the most reasonable payment method. For that reason, you should conduct research relating to the company ethics, the volume of work, and the locality of your business before deciding the amount of money you will pay yourself.
3. Pay yourself as a Limited Liability Company Member
Paying yourself as an LLC member, you should distribute the business profit made during the financial year. According to the operational agreements, all the members will receive a share of their profits.
Common Mistakes to Avoid When Paying Yourself as the Entrepreneur
1. Failure to Separate Your Personal and Business Funds
You should open a business bank account because any money you earn from your business is not yours and should be deposited into this account. You must understand that your business is an entity separate from you personally. All the business expenses should be made from this account. Additionally, you should have a separate credit card for yourself and the business.
2. Working Without a Business Budget
Most business owners don’t understand the importance of having a business budget. A business budget tolerates evaluations of your upcoming expenses and income. It simplifies controlling your business finances.
3. Failure to Managing Your Cash Flow
Cash flow is the amount of money getting in and out of your business. A positive cash flow is needed for your business to keep operating. So, more money should be coming in than going out; for instance, you should not pay yourself more money than the business is making.
4. Having Excess Inventory
Having too much inventory may lead to slow cash flow. You will have to cater to the expense of the extra inventory until it is sold. To avoid such faults, you must be very accurate about the number of sales you want to acquire.
5. Not Taking Care of Yourself
Entrepreneurs are very contented in doing everything needed for their businesses to succeed. You should permanently save money for your retirement plan regardless of what your business is making. This will motivate you to understand that your business is a source of cash flow.
As an entrepreneur, you should always think about your salary. It would be best to consider your salary as part of your business expense.