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Monday, February 27, 2012

How Much Should You Pay Yourself As An Entrepreneur?

From a "tax perspective", if you are a sole proprietor, all of your profits are your income and your 'technically' do not pay yourself a wage. If you are a Corporation (or an LLC taxed as a Corporation), then you should be paying yourself a wage. And yes, many shareholders (owners) under value their services. However, if IRS audits your business and determines you've done this, they can re-assess some of the company profits as wages and make you pay payroll taxes (and penalties and interest) on the unpaid payroll taxes.

I would recommend that any business owner set up as a Corporation be sure to discuss with their accountant what a "fair" wage is for the services the owner is providing to the company. There are many factors to take into consideration when determining what a fair wage is...and that is not something that you can really compare to other business owners...it is something that matters to what your financial numbers are, what your goals are, what your profit percentage is, and the list goes on. The key is not getting caught in an audit for not paying enough to yourself as the owner of the business.

It really depends what the business can afford.

Your business will ebb and flow particularly at the early stages, at this point the best thing to do is take a very basic salary with a bonus structure which starts as soon as your business reaches the profit stages.

When your business is consistently profitable, you should re-evaluate your salary and take an increase equal in percentage to the business's annual growth rate.
In all circumstances, a regular assessment of your personal finances enables you to adjust accordingly.

Most small businesses work (or should) a business plan that has the following 2 drivers in determining the pay for the founders.

1. The % of ownership in the business based on investment in time and funds as reflected in an operating agreement.

2. The break-even point where the business begins to turn a profit and distribution of the proceeds is possible to the principal(s).

Short of the above, entrepreneurs must face that fact that ones value is driven solely by the success of the enterprise. For anyone to justify a standard quantification of that is "Sky Bluing" it with little meaning.

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