The first thing you need to realize is that as a small business owner, drawing a salary is just one of the options when it comes to paying yourself. The second thing you need to realize is that there are no rules about how much you pay yourself. You have to decide what’s best for your business’s stage of development and your personal situation.
Traditional Advice for Start-up
The theory is that the more you can cut down on your operational expenses, the better chance your small business has to succeed. Reason being that your business would need less capital to get up and running and it wouldn’t take long to keep it going. If you are going to pay yourself anything during start-up, your salary should be just enough for you to get by.
Show Them the Money
Not paying yourself a salary does nothing for you business either. If you are looking for funding for your small business, not including a salary for yourself as one of your expenses will raise a red flag for any potential investors looking at your proposal. An owner’s salary is an expected expense; not including it gives your potential profits a negative view. Also by not including a salary you are leaving out a future expense.
Reflect what you’re Worth
Start with your personal expenses; rent, utilities, groceries, car insurance… Then add your start-up and operating expenses. If you are seeking funding for your small business, the next step is to figure out what you’re worth; the skills and expertise you bring to the business and what your peers are paid. Then finding out who your competition is and how much they charge. Paying yourself what you’re worth from the start will give you the incentive to work hard on your growing business.
When your Business Grows
Once a small business reaches the break-even point, many business owners are tempted to re-evaluate their salaries, but raising your salary could tip your business back into the red. Instead, wait a year past your break-even point and then re-evaluate, assuming your business can afford it. Once a business is stable, most owners pay themselves by taking a percentage of the profits, no more than 50%.
Remember the worst time to take significant amounts of money from your business is when it’s growing.