When Starting a business or a startup company, you at first may forget about considering how to pay yourself in the course of building the business, when drafting your first business plan. It is really funny that many business and startup company owners still use up all the profits coming into the company without having a protocol to determine how much they earn as founders.
Most smart business or startup company owners usually pay themselves weekly or monthly. This is usually to maintain household and other personal living expenses that may arise later.
Excess income is to be left in the business, this is because unexpected and unplanned business expenses might rise later. This is where the rainy day fund for your business can help. Having a reserve of cash in the business reduces the need to dip into your pocket when there’s an unexpected expense at the shop or office. So adding this to your initial business plan can be a stepping stone to success as the business grows.
How to Pay Yourself as a Business Owner
Many entrepreneurs don’t usually have the will to take any money in the early stages of their business. However, as success comes gradually and your business is on firmer footing, it is usually normal to start thinking about paying yourself so that you can factor other remnant amounts into the business’s expenses. According to LegalZoom, You’ll need to decide how often to pay yourself.
How then do you decide how to draw money and pay yourself as a business or a startup company owner? In most cases, you don’t pay yourself as a Limited Liability Company. You can pay yourself as a business owner or a founder depending on the tax structure your business falls under.
1. Salary Draw
If a business structure falls under a corporation or a Limited Liability Company, you can take a salary. It is important to hire a business accountant. An accountant can walk you through the requirements and tax advantages of a business structure as a corporation or an LLC. Also, remember that you might need a Business Current Account.
In this situation, having a good business current bank account should be one of the first things to consider for your business as you create a Business Plan. In the 21st century, when you run a business with personal bank accounts you might end up finding it hard to keep track of all your transactions as well as calculate your income and expenses properly.
2. Founder’s draw
You can take a founder’s draw if you have a sole proprietorship or partnership business structure. An accountant can walk you through the requirements and tax advantages of a business structure. That you don’t have an accountant to keep you in check does not mean you can just spend as you like. This founder payment or draw method here should cover all your obligations, such as a mortgage, car loan, and basic expenses. If you are a sole proprietor you can simply pay yourselves by withdrawing cash from the business profit.
Once you’ve decided how to pay yourself as a business founder, you still need to decide what to pay yourself. That number needs to strike a balance between what your family requires and what your company needs.
3. Ratio Draw
This is the simplest type of payment method in which there aren’t many worthwhile statistics and calculations. It is the 50-30-20 protocol. In this situation, owners often pay themselves a salary, which does not work the same way as with a normal job. The salary or draw is not usually based on the tax you pay.
- Fifty percent for re-investment
It’s common among owners of smaller businesses. The 50-30-20 protocol indicates that after all the profits have been calculated and determined at the end of the month, fifty percent of the total profit is used to pay the owner’s salary. If you own any debt, try to keep up with what you owe and when it’s due so you don’t draw too much from the business at the wrong time, this is based on a Forbes study.
- Thirty percent for re-investment
Now the last thirty percent should be re-invested back into the business. This is the part where you use this fund for developments and improvements. You might want to buy new work tools, try a new marketing idea, get a business lawyer, or hire a business website designer.
- Twenty percent for saving
According to Quickbooks, thirty percent is saved in the business’s current bank account. This is where the rainy day fund for your business can help. Having a reserve of cash in the business reduces the need to dip into your pocket when there’s an unexpected issue with your business. It is like having financial security. This financial security will help to clear your head and help you as a business owner to focus more on your business.
How about an Insurance Plan
While you re-invest thirty percent of the total profit back into your business. Don’t forget that you need to make space for your insurance plan. When you think of the best insurance plan package for your company, the numbers don’t always stack up, so definitely speak to an accountant or insurance professional to decide what’s right for your new business.
