Shanu Singh Guliani

Are You Compensating Yourself Enough?
February 8, 2007

You’re getting by on an insignificant salary because that’s what’s best for your startup company. 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. Here are a few things you’ll want to keep in mind when determining when and how much you can expect your business to compensate you during the startup phase.

1. When can I begin to compensate myself?
   • Unfortunately, you’ll most likely not be able to take a real salary for the first 6 to 12 months or until your business starts making a large enough profit.
   • Try and set aside enough to cover your living expenses, so you’re not relying on you’re business to cover personal expenditures. Maybe your spouse’s pay can cover enough for you two to get by.
   • The idea is to minimize your overhead in order to decrease the amount of capital required to make your business a success.

2. How much can my business compensate me during the startup phase?
   • The best way to find out how much salary to take is to find out what the market rates are for CEOs in your industry and your size of business. Trade associations in your field can help. Once you’ve got some idea of what others in the sector are earning, try to fit a similar figure into your financial estimates and see if it’s viable.
   • Remember not to increase your compensation just because the business has some extra cash. This money should be saved for expansion purposes and unanticipated situations. You’ll want to ensure that your business has enough money set aside for a “rainy day.”
   • Owners often take draws to supplement their payroll, if profits allow. For tax purposes, the payroll and draws are kept separate. They’re also classified separately on your financial statements. 

3. Other than taking out salary, how can I get value out of my business?
   • If you chose to go without compensation during your start-up phase, then you can take larger compensation later 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.
   • 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 cause suspicion from the IRS.
   • You can elect to pay yourself any amount you want by declaring it a dividend.
   • You can hire family members and pay them just like regular employees (as long as they’re working just like regular employees). This may help to keep the money in the family.
   • You may be able to pay for entertainment, company cars, luxury business trips, and give yourself other attractive benefits--and have them treated as tax-deductible business expenses.

Posted by Shanu Singh Guliani on February 8, 2007 | Comments (0)