Own a Business, but Not Compensating Yourself - It's Time to Reassess
Business owners put in long hours. I know this because I get emails from bookkeeping clients after hours and on weekends. A business start-up is especially demanding. Plus, cash flow is tight when a business is new. Because cash flow is limited, some small business owners forgo compensation. After all, won’t the business be stronger if the earned income is invested back into the company, not spent on compensation? While that’s a logical argument, I advise business owners to follow a different financial strategy. Here’s why business owners should compensate themselves fairly.
Compensation is a Powerful Incentive
First, regular compensation is a powerful incentive. Eventually, the wonderment of a business start-up begins to fade. Think about it. You didn’t open your business simply as an outlet for your passion and a way to spend your time. That’s what hobbies are for! You opened your business to earn a profit, so you can make a living and reach your financial goals. Compensating yourself for your work is a smart business incentive.
Compensation Shows Financial Security
Second, business owners who compensate themselves build their personal savings. When approving loans, lenders look at the financial strength of business and personal accounts. The two accounts are closely related. A healthy personal financial statement is instrumental in securing a loan. Banks and investors look favorably on business owners who have the financial security, not to mention the business acuity, to pay themselves. Compensation is a sign of commitment to your business, and that’s something that lenders look for – a sure bet.
Fair Compensation for Business Owners
So, what exactly is fair compensation for a business owner? Basically, it depends on your business strategy and your business finances. For a business start-up, I recommend paying yourself enough to get by. As the business grows, compensate yourself comparable to professionals in a company of your size. If you’re not sure about the amount, search online for a salary guide. Alternatively, you can check with a local business organization or a trade association.
It’s worth noting that for some entity types (S-Corp for example), the Internal Revenue Service requires you to pay yourself a reasonable salary. Paying yourself too much or too little can raise eyebrows. The IRS offers a guide for businesses and self-employed, titled “Paying Yourself.”. As your profits grow, your salary grows along with it. Think of the compensation as an investment in yourself!
Contact Us for Payroll Processing
Running your own business is rewarding, but it’s time consuming and demanding, also. Even if cash flow is tight, business owners should pay themselves fairly. To help business owners accomplish this goal, Prosperity Bookkeeping offers full-service payroll processing. To get started with payroll and other accounting services, tell us your bookkeeping story. https://docs.google.com/forms/d/e/1FAIpQLSeT8EX1dxXQOMZFniiPkzAbIpxJJ4-acSbiSZ8A0VJ_8z-4rg/viewform