Definition: The wages a business owner pays himself for work done for the
business
There's no place where self-discipline plays a more important
role than in setting your own salary. As the owner and founder of
your business, you can allocate as much or as little of the
company's profits as you want to your own paycheck. You can even
decide to go further: You can tell your accountant to cut you a
check equal to the entire month's sales. That'll be a high-water
mark for your earnings, however, since draining that much cash will
ensure that it's your last month in business.
There are two groups of interested parties in the decision about
how much to pay yourself. First, you have to do right by your
partners (if any), employees, suppliers, creditors and customers.
If you take money out of your company for yourself, to the extent
that any of these parties are damaged, it could be a mistake.
But you also have to consider yourself (and perhaps your spouse
and your children), as well as any charitable causes you support
out of your earnings. These interested parties deserve a fair cut
of the bounty, too. You should get a decent return on the labor and
risk you have invested. Your family should, of course, share in
those benefits.
Complicating the issue is the fact that there's no set amount an
entrepreneur should earn. Strictly speaking, it's all yours--or as
much of it as you retain ownership of. Of course, a board of
directors, partners, other owners and lenders may also have a say
in this. Absent all limits, in a world where only you and your
company are involved in the decision, you have to choose between
taking money out to spend on yourself and your interests outside
work, or reinvesting it in the company, where it can power further
growth. The decision to take or reinvest profits is a highly
personal one that turns on the fulcrum where your interests and
those of your business coincide.
Other than taking a salary, there are several ways you can get
value out of your business:
- Dividends. You can elect to pay yourself
any amount you want by declaring it a dividend.
- Paying family members. You can hire family
members and pay them just like regular employees (as long as
they're working just like regular employees). This at least keeps
the money in the family.
- Fringe benefits. You may be able to pay for
country club memberships, company cars, luxury business trips to
popular destinations, and give yourself other attractive perks--and
have them treated as tax-deductible business expenses. Just make
sure you offer them to other employees as well.
- Delayed compensation. If you chose to forgo
compensation during your start-up phase, when cash was critical,
then you can take larger compensation now without fear of being
accused by the IRS of taking excessive compensation--as long as you
carefully documented your delayed-compensation plan when you were
carrying it out.
- Don't forget loans. You may be able to take
a loan from your business as long as you document it in writing,
pay a market rate of interest, and have a definite schedule for
repaying it. Without those features, a loan between a business and
its owner may run afoul of the IRS.