This is a collaborative post
When you first start a business, you will just be trying to break even. There are a lot of overheads to cover and at the beginning, you won’t be bringing in enough money to pay them and make a profit afterwards. But as things pick up and you eventually start turning a profit, you need to think about how to pay yourself.
If you pay yourself too much, too soon, you will cause financial issues with the business. However, you also need to value yourself properly and pay yourself enough to live comfortably. So, how should you pay yourself when you run a business?
Understand Your Tax Obligations
Before you think about paying yourself, you need to understand your tax obligations because these have an impact on your own pay. Make sure you understand the taxes you have to pay with salaries, expenses and payments, so you have a clear idea of how taking money out of the business will affect your tax affairs. If you are unsure about this, you should consider speaking to an accountant so they can help you wrap your head around it.
Reinvest In The Business
Once you have paid any taxes, make sure that you reinvest as much money in the business as possible. This way, your business will grow and can become a valuable asset to you which will eventually pay dividends of its own accord. Putting money into things like social media marketing, new technology, and new employees will help the business grow. Even though this means that you will pay yourself less now, it means that you can take more money out of the business in the future as it becomes more successful. Any money that you reinvest in the business can be claimed as an expense on your tax return too, so you will save a lot of money on your annual tax bill.
Take A Salary
You can take a salary from your business and you will pay yourself this money as income. However, you should also have a legally binding contract between yourself and the business about this. You should decide how much money you can take each month and you need to make sure that your salary is not more than 50% of your profits.
If you pay yourself too little, it won’t be fair because you will still be working hard for the business. But, if you pay yourself too much and your business doesn’t earn that much, you will find yourself in a tough financial position.
Taking a salary is often the simplest option, but it is not the most tax-efficient, so you should consider other options.
One alternative is to take dividends, instead of a salary. You should calculate how much money you need to live on and then make sure that the business doesn’t pay out more than this in dividends. If the company does have profits that are not being reinvested, you can issue dividends from these profits rather than taking them out as a salary.
You will have to pay tax on dividends, but you will also be able to claim expenses and losses against these. This means that you can often pay yourself the same in dividends instead of taking a salary, while still making sure the company has enough money for your overheads.
Take Payment In Stock
Another option is to take payment in stock instead of a salary or dividends. This means that you won’t get any money, but when the business starts doing well, you will have helped it grow by investing in it and taking payment for that work in shares rather than cash. You can pay yourself the same amount in stock that you would have paid in a salary or dividends, but it will be worth more later.
When the business grows and the shares become worth more, you can then sell them off for a large lump sum. This is a good way to plan for the future, but it does mean that you earn less money now.
When deciding how to pay yourself from your business, you need to think about your current financial situation. If you rely on the money to live on right now, taking a salary is the most stable option. However, if you want to help the business grow and make plans for the future, you should consider dividends and shares.
Whatever you decide to do, it’s vital that you don’t undervalue yourself because you are putting a lot of work into this business.