How to Pay Yourself as a Business Owner

At the beginning of the company’s development, the owners of small and medium-sized businesses often receive almost no income from it. More than half of them continue to invest their personal savings, even when the business is already profitable. This happens because there is no clear view of how much they can and should pay themselves.

Let’s look at seven main rules that will help you build a system of payments and balance the costs of business development and covering personal needs. 

How to pay yourself a salary

Some of our recommendations are related to legal and tax issues, but they may differ significantly in different countries and situations. Therefore, for more detailed advice on your specific business case, please get in touch with our specialists. 

Determine ways to pay yourself from your business 

A business owner can receive a salary in three different ways. The choice depends on the business type, how often payments are needed, and which option is the most profitable. It is essential that the methods are not mutually exclusive – in different cases, they are combined and changed based on specific business needs. 

Owner’s share 

If you take your share from the business as a salary, in fact, it is implemented as a regular distribution of funds – a transfer from the company’s account to your own. But you can’t just write yourself a check. This transaction should be recorded like any other business payment.

Salary

Setting a salary is the best way to pay yourself for a small business, especially at the very beginning of the company’s development. It’s good to appoint yourself to a position and receive a monthly payment, like an ordinary employee. The amount of salary you will pay yourself is most often selected as relevant to the tasks performed.

Dividends

A dividend payment is the distribution of business profits to shareholders. Companies pay them, as a rule, according to a specific schedule – once or twice a year. The payment amount will depend on the profit level, business development strategy, and the agreement between the shareholders. For example, you can pay out 10% of profits in the form of dividends, and the rest of the funds go to further investment in the business.

It is important to note that businesses can pay dividends only from retained earnings. Therefore, you should first ensure the company has a sufficient accumulated amount. Most often, companies pay out retained earnings from the previous year in dividends, even if the business has suffered a loss in the current year.

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If your company is registered abroad, we will provide you with the professional assistance in bookkeeping and reporting. In addition, we will help control the business management and, if necessary, prove the legality of the funds’ origin.

Pay salary not from income, but only from net profit

It’s not recommended to take money from the business at any time, even your appointed salary. Otherwise, there may not be enough funds for current expenses in the future. For instance, your business has received a significant income when the order is completed, and the customer has paid in full. But at the end of the month, you need to pay office rent, taxes, and hourly salary for employees, which is difficult to calculate in advance.

Therefore, the main rule is to pay yourself only from the net profit and not the company’s total income. Before you take your paycheck out of business, it’s essential to ensure that all possible future expenses are accurately accounted for, and you left money to pay them. The same happens in the case of dividends when payments are made for the past period from already explicitly generated business profits.

Predict your business money flows

When determining the amount of your salary, make sure your business has sufficient money flow for this. For example, you withdraw money and have a shortage of funds to pay business bills. You will have to return them back, which will create unnecessary difficulties in accounting and additional tax liabilities. It is always better to have a small reserve of funds in the company for unforeseen business expenses.

Consider the company’s legal structure and the taxation system

Each business has its own organizational form and legal structure – a corporation, a holding company, a joint-stock company, or a limited liability company. Or you can just be the sole owner of your business. The way you pay your salary, and its amount will largely depend on the enterprise’s structure and form.

For example, it is more profitable for a large business owner to set a high salary. So, it will reduce net profit and optimize taxation (minimize tax deductions). But you need to be very careful – government agencies closely monitor this. They require the business owner’s salary level to be within reasonable limits. That is, it must correspond to the assigned position and functional duties.

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Depending on the country of incorporation, each enterprise form and business legal structure has its own characteristics and nuances. Therefore, please contact our specialists for more detailed information about tax planning and reducing the tax burden.

Build a clear salary schedule

 By appointing yourself to a position, you will receive a salary as an ordinary employee – once or twice a month. But it is better to adhere to a strict schedule for other payment methods, for example, when you pay yourself the owner’s share. Even if the amount depends on the company’s profit and changes periodically, a clear schedule will help in further business planning.

 This practice is especially useful when company employees have access to payroll records. If they see that you can take money out of business at any time, this negatively affects their motivation to work. For the same reason, it is not recommended to overestimate the level of salary you pay yourself. It is better for employees to know your payment schedule and be confident in the fairness and legitimacy of payments.

Set the exact level of your salary

Business owners have several ways to determine the level of their salary. If you appointed yourself to a position, conduct an analysis to find out how much similar businesses pay their employees. In addition, check what salaries are offered in open vacancies on job search sites. Naturally, the salary level largely depends on the specialist’s qualifications, so you can choose the maximum bar to pay yourself. 

When calculating salaries in the United States, business owners can rely on data from the Small Business Administration website. The section you need is income statistics. But at the same time, it is essential to consider the difference between salaries in large and small cities, as well as the peculiarities of taxation. 

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We remind you that there are countries with no income tax for individuals and businesses. You only need to obtain a tax resident certificate to take advantage of this opportunity.

If you decide to pay yourself a salary as a percentage of the profits, it should not fluctuate and change every month along with your business income. It is recommended to determine a clear fixed rate and use it to pay yourself.

For example, you predict net income this year to be at least USD 100,000. As a business owner, you pay yourself 50% as a salary and invest the rest in the company’s development. So, we divide USD 50,000 by 12 months and set the salary level in the amount of USD 4166 per month. 

In the early stages of business development, especially for a small business, the owner does not always have the opportunity to take money from the company for personal needs. Therefore, it is recommended to foresee alternative sources of income in advance or use your savings during this period.

When setting your owner payment, you need to optimally balance profit generation to cover personal expenses and reinvest in the business. 

Naturally, the salary should provide the business person and their family with a comfortable life. But it will be best if you do not forget that the company also needs to have a sufficient amount of money:

  • For unforeseen costs – both variable and fixed costs may increase in the future. The cost of products or raw materials from suppliers, fuel, office or warehouse rent you need to pay may rise.
  • For a rainy day – it is advisable always to have an emergency reserve in the company to survive a crisis or possible business failures. You can keep, for example, an amount that will cover all expenses for 30, 60, or 90 days.
  • For development and reinvestment – a certain amount of money should be left and accumulated for the constant improvement of your business. This is not only about direct diversification but also about smaller but important business issues. For example, you can decide to upgrade equipment, purchase new tools or uniforms for employees, change the marketing concept, or hire a consultant. 

Pay employees first 

When the business has temporary financial difficulties, then your payment can be suspended. But, if possible, you should pay the salaries of the company’s employees in full. If you do the opposite, and they see that you pay yourself, and their payment is delayed, then the outflow of personnel is added to the financial difficulties of your business. 

It is more profitable for business owners to transfer their salary to accounts in foreign banks. For more detailed information, contact us at info@offshore-pro.info or use phone numbers from the contacts section. We will help you choose the best offshore zone, prepare documents and open an account.

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