How to Pay Yourself as a Business Owner
~by Christine Schoaff~
You’ve had a great idea and started your business, and now it is growing. As an owner you’d like to enjoy the results of your success.
Now what about paying yourself? How do you see money as an owner, and what are the options? There are five options explained below. Be sure to consult with a bookkeeper, CPA or other financial professional on your specific situation.
Here are five options for paying yourself:
1) Expenses: If your business has enough cash flow to cover basic operations expenses, you can consider having the company cover other expenses. For example, the company can pay for meals when there is a business purpose such as meeting with a client. The company can pay for mileage of your personal car when used for business purposes or to purchase a vehicle outright for your use on business matters. Be aware the you must keep the corporate and personal separate and clearly defined. Company expenses must have appropriate documentation such as receipts. Only some costs are allowed as business expenses.
2) Loan repayment: Many owners provide cash to their company for general operations in the startup phases. When the funding is structured as a loan from the owner to the company, then loan repayment can be a means to returns funds to the owner. It is important to maintain clear documentation, especially the amounts of principal and interest repaid.
3) Dividends: Some business structures, such as S Corporations, have the option to distribute dividends to owners. Dividends are funds, shares or similar, issued to owners according to the percentage of ownership. So if you have two owners, 80% and 20%, a $100 dividend will be issued $80 to one and $20 to the other.
4) Owner’s Draw: With some business structures, such as Sole Proprietorship, the owner can withdraw funds up to his previous investment and a portion of the other retained earnings.
5) Salary: As an owner, you can also be an employee with a full W-2. This involves the same taxes paid by the company and the employee as every other employee (see ‘The 5 Costs of Running Payroll‘). Generally, if you are paying dividends, you should also have some portion of your compensation as a salary.
An accountant or other financial professional can help you understand how to coordinate all of these options appropriately.
Christine Schoaff has been an entrepreneur and intrapreneur in opportunities from start-up to mid-size to Fortune 500. She has worked extensively with family run businesses in a variety of industries.