There’s no place where self-discipline plays a more importantrole than in setting your own salary. As the owner and founder ofyour business, you can allocate as much or as little of thecompany’s profits as you want to your own paycheck. You can evendecide to go further: You can tell your accountant to cut you acheck equal to the entire month’s sales. That’ll be a high-watermark for your earnings, however, since draining that much cash willensure that it’s your last month in business.
There are two groups of interested parties in the decision abouthow much to pay yourself. First, you have to do right by yourpartners (if any), employees, suppliers, creditors and customers.If you take money out of your company for yourself, to the extentthat any of these parties are damaged, it could be a mistake.
But you also have to consider yourself (and perhaps your spouseand your children), as well as any charitable causes you supportout of your earnings. These interested parties deserve a fair cutof the bounty, too. You should get a decent return on the labor andrisk you have invested. Your family should, of course, share inthose benefits.
Complicating the issue is the fact that there’s no set amount anentrepreneur should earn. Strictly speaking, it’s all yours–or asmuch of it as you retain ownership of. Of course, a board ofdirectors, partners, other owners and lenders may also have a sayin this. Absent all limits, in a world where only you and yourcompany are involved in the decision, you have to choose betweentaking money out to spend on yourself and your interests outsidework, or reinvesting it in the company, where it can power furthergrowth. The decision to take or reinvest profits is a highlypersonal one that turns on the fulcrum where your interests andthose of your business coincide.
Other than taking a salary, there are several ways you can getvalue out of your business:
- Dividends. You can elect to pay yourselfany amount you want by declaring it a dividend.
- Paying family members. You can hire familymembers and pay them just like regular employees (as long asthey’re working just like regular employees). This at least keepsthe money in the family.
- Fringe benefits. You may be able to pay forcountry club memberships, company cars, luxury business trips topopular destinations, and give yourself other attractive perks–andhave them treated as tax-deductible business expenses. Just makesure you offer them to other employees as well.
- Delayed compensation. If you chose to forgocompensation during your start-up phase, when cash was critical,then you can take larger compensation now without fear of beingaccused by the IRS of taking excessive compensation–as long as youcarefully documented your delayed-compensation plan when you werecarrying it out.
- Don’t forget loans. You may be able to takea loan from your business as long as you document it in writing,pay a market rate of interest, and have a definite schedule forrepaying it. Without those features, a loan between a business andits owner may run afoul of the IRS.
