Paying Yourself in a New Business – Key Issues
Oct 11th, 2011 | By Sharon Hurley Hall | Category: Money & Business, Women in Business
To pay or not to pay, that is the question. I hope Shakespeare will forgive me for cannibalizing his words, but the Bard’s style seems appropriate for posing a key business question. When is it right to pay yourself? For many business people, paying themselves is the last in a long list of to-dos; they are too busy throwing all their energies into creating a thriving business. While there’s nothing wrong with that, at some point you need to operate on a sound business footing, and that means paying yourself.
Put it in the Business Plan
If you set up your business properly, then you will include a salary for yourself as part of the running costs. Yes, it may not be the full package you got when you were working for someone else, but your time is valuable, so you should put a value on it. Even at the start of your business, you should get some financial reward, after all, you still have to eat. Many people build in incremental salary raises over a three or five year plan so that as the business grows, their reward grows with it.
What’s in the Kitty?
Of course, if your business isn’t yet making any money, then there may be nothing in the kitty. If this is the case, then it’s ok to wait, as long as you don’t forget about it. If you can’t pay what you are worth, then take what you need to get by. You won’t be able to run a business effectively if you are worrying about your household bills, so take care of these by paying yourself enough to cover them.
How should you pay yourself? Some businesses use a dividend model, where they divide up money at the end of a set period, say, quarterly, giving a set percentage to everyone who is owed money. If you have multiple investors in a business, this approach may work well, especially if you are not dependent on the income from the business for your support and day-to-day living expenses. The advantage of this approach is that money stays in the business for longer periods; the disadvantage is that you are never quite sure what you will earn. And whether you call it a salary or a dividend may affect your tax situation.
When to Pay Yourself
When should you pay yourself? If you are not using the dividend model, then pay yourself monthly at the same time as you pay anyone else who’s working in the business. That will help you with managing payroll and financial planning for both you and the business. Don’t forget to set aside money for taxes; this is easy to do when you run your own business. The tax due will depend on how you set up your company and how much you actually earned. If you have trouble figuring this out, then get professional advice for the first year – that will be a great business investment.
When NOT to Pay Yourself
Now that you know when it’s OK to pay yourself and how to do it, there’s just one more key issue. When should you NOT pay yourself? There are three situations when you shouldn’t pay yourself: when there is no money in the bank to cover employees’ salaries, when there is no money in the bank period and when you have to make a major business investment and need all your cash. Beware, though, don’t let non-payment of your salary become a habit or you’ll wonder why you started the business in the first place. Passion is all very well, but you also need to get paid so you can enjoy all the benefits of running your own business.
Sharon Hurley Hall has been writing professionally for almost 25 years, and she does it because she loves it. She is a word nerd, a Scrabble fiend, fanatical about grammar, and is fascinated by learning new things. Since 2005, Sharon has mentored other writers at Get Paid To Write Online to help them improve and build sustainable and successful writing careers. Sharon subscribes to the ‘fine wine’ theory of aging – getting older also means getting better! Find Sharon on her website: http://www.sharonhh.com/, Twitter: http://twitter.com/#!/shurleyhall and Facebook: http://www.facebook.com/SharonHurleyHall