Should You Pay Yourself First

When starting a new business, you may wonder if it is a good idea to pay yourself first. Before answering that question, you need to balance your personal needs and the needs of your business.

When to Pay Yourself
As you wonder how much to pay yourself (if anything), keep in mind that business startups are undeniably hard on new owners. Many new owners are not able to draw salaries for months. In fact, you may not be able to draw a regular paycheck for up to a year or more. This means that you have to plan well in advance before starting your business so that you have sufficient cash in your bank accounts. This is also one of the reasons that many people start their businesses part-time while they still have regular jobs.

Once your business becomes more profitable, it can be tempting to start paying yourself more. Remember that you are in business for the long haul, not just that month. Consider putting some of your excess cash aside for times when you run into financial snags on the road to prosperity.

How Much You Should Pay Yourself
When your company can afford it, pay yourself what you would be paid if you were to have a similar position in another company. You may want more, you may need more and you may deserve more, but you have to focus on the long-term health of your business. Paying yourself too much can also be a red flag to the Internal Revenue Service, which frowns on excessive compensation.

Another way of looking at how much to pay yourself is to look back at your motivation about starting your own business. If you started a business because you wanted independence, had a great idea and have no plans to sell your business or look for investors, you have more flexibility in taking a salary. You still have to look at your long-term financial goals, but you do not have to worry as much about how your company "looks" to outsiders.

If, however, you plan on expanding your company rapidly through investors, you may want to take a different approach. Investors look at your level of commitment as a company owner. Even as their businesses expand, many who intend to look for investors take out modest salaries.

Your Company Structure
Another factor that affects how to pay yourself is the structure of your company. Are you a sole proprietorship, a partnership, a corporation or an LLC? The best way to pay yourself in a LLC may be different from the best way to pay yourself in a sole proprietorship. This is because tax laws on each type of structure are different.

For example, in general, if you have a sole proprietorship, you will report your business income or losses on your personal tax returns. However, if you have a corporation, the business is "separate" from you. Your corporation will have to pay taxes as an entity, and you will have to pay taxes on your income as part of your personal taxes.

How to Pay Yourself
If you own a business, you have several choices about how to pay yourself. These choices include:

  • Delayed compensation: You can choose to not pay yourself as you are starting your business. The trick is to keep terrific records so that the Internal Revenue Service does not think that you are awarding yourself excessive compensation later when your business is up and running.
  • Dividends: You can award yourself dividends. If you have a corporation, your Board of Directors will have to approve the amount.
  • Benefits: You may be able to lease your car through the business, buy a country club membership through the business or run other perks through the business rather than pay for them from your personal accounts.
  • Loans: You might be able to loan yourself money from the business, as long as you write up a contract, pay normal interest rates and follow a schedule of repayments.
  • Pay yourself a salary.

Tax Laws
Be careful that you follow federal and state tax laws when you pay yourself. You are not, in reality, going to be able to write every expense that you have off to your business. The Internal Revenue Service does not like this and might hit you with hefty penalties. Make sure that you consult your business lawyer and your accountant as you set up your business and beyond so that you pay yourself within the law.

As your business prospers, so should you. Planning ahead for how to pay yourself can benefit you and your company in the long term.

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