Why do people start businesses? There are so many reasons why business can be started. However, when critically analysed, they boil down to three main points; to be their own boss, to make a profit, and to help the community around.
The primary motivation behind starting a business is to be self-employed. It pays a lot when you work for yourself. You don’t have pressures associated with being employed. You can give the venture more than the best that one can ordinarily offer.
Also, a business needs to profit. If you are not running a charitable organization, then profit-making is among the first goals of a business. The revenue earned from the company should be sufficient enough to meet all the expenses involved in its day to day operations as well as to make profits. If a business cannot breakeven, then shutdown is imperative.
The community around also benefits from the business through employment creation. Community members can improve their living standards through the wages they earn.
where businesses are located, infrastructure development takes place. But in
this bog, we want to focus our attention on the benefit that a business owner
gets and how such gains can be harvested. Are you a business person? What is
the best way to pay yourself from a start-up? Let us see.
to Pay Yourself
There are different strategies in
which business people can pay themselves. However, the best policies depend on
the structure of the business. Some entrepreneurs gain distributive shares
rather than wages and salaries. Some even receive just a draw. For instance, a
sole proprietor earns a draw. This means he or she cannot get a regular pay
check but instead takes a certain proportion of the profits from the business.
If you are wondering about how best to pay yourself, consider the following:
Avoid Guessing About Your Salary
Many people think an opportunity to decide their own salaries is something fantastic. Nevertheless, business owners are aware that reality is rather tough and complicated. You are supposed to pay yourself specifically from the earned profits and not the business revenues. Why? The business revenues may be far away from the net profits.
If you are not careful, you may end up consuming the capital of the business without knowing. Whenever you see funds streaming in, never ever assume that you can pay yourself a portion of that amount. Before taking your portion, you have to ensure that you have considered other relevant elements, such as taxes and payroll.
You are also supposed to think about your business fixed costs as well as other variables. There is some accounting software that helps determine the amount of salary you need to take from the business. This software takes into account all the expenses of the business and computes profits rather than revenue.
Some can even help you determine the specific areas from where you take deductions for tax purposes. Also, several influences the salary that you can set for yourself. The following points will help you arrive at the best figure for yourself.
Avoid Undervaluing Yourself
A business that is starting may not make profits within the first year of operation. But does this mean you should not compensate yourself? It is senseless to be a total miser with your business’s money if, by any chance, it leads you to financial and emotional distress. Personal money concerns are significant causes of stress.
Without an element of stress, you cannot make effective business decisions. Without valuing the work, you are doing may end up harming the performance of the business. For this reason, pay yourself sufficiently to have a decent living without worries. Use what you have to avoid damaging the business as well as your personal life.
Be Part of The Payroll and Make Sure
You Are Paying Yourself Regularly
One of the biggest mistakes you can ever make is to dip your hands into the business funds whenever you feel you need to. You need to draft payments for employees as well as for yourself in the payroll software and ensure you are sticking to them.
Establish that in your business plan from the point go. You may consider increasing your salaries as the business grows. If you keep doing this, you will get used to the funds that you will be receiving. You will not take a large sum from the business for vacation.
This will actually be fair to both
parties, including your workers. Regular but small remuneration will be more
acceptable compared to large irregular sums taken from the business. Significant
withdrawals from the business may not be acceptable even to the government.
Such actions will raise concerns at the tax office. It may necessitate the
auditing of the business organization.
Compensate Yourself Reasonably
Depending on the place that you
live, reasonable compensation is necessary. This is actually the amount of
funds that you are expected to take from the business. It primarily depends on
the size of the entity, the market served, sales, and revenues. The following
are some of the factors for consideration.
- How much would the
business incur on the work that you are doing in your capacity?
- Are your wages
comparable to your duties? Are those responsibilities discharged?
- Is what you earn
directly proportional to what you do?
Look at the Legal Structure of the
The legal structure of the venture
may determine the much you can earn and when exactly are you supposed to earn.
For instance, sole proprietors are at liberty to pay themselves the amount they
want and the time that they also wish to. This is because they are not
answerable to either shareholders or stockholders. However, other entities,
such as incorporated organizations, often have the owner of the venture on the
payrolls and are entitled to wages regularly like other workers.
The Bottom Line
There are different ways in which
business owners can pay themselves. The strategy used depends on various
factors such as the nature and the structure of the business. It is good to be
careful with how you pay yourself. You don’t have to be very mean to yourself,
but at the same time, you don’t have to take too much from the business than
what is necessary. In the next blog, we will discuss various funding options,
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