As a business plan consultant, I often work with startups who are still in the “idea” phase and hire me as their business plan writer to move into the “action” phase. One of the biggest questions I get from these entrepreneurs: can I take a salary from my new business, even before it is profitable?
Many of these new entrepreneurs are willing to take the road of humble beginnings and will tell me that they want to avoid taking a salary or will settle for something around $20K a year for their annual paycheck. While this may seem like a noble goal, I firmly advise my clients that budgeting for their startup salary is very important.
Startup Business Plan
As a startup, your business plan needs to include a proper startup salary allocation. It can feel “right” to not take a salary in the beginning, as if you don’t deserve to claim cash from the business unless the business is thriving.
While this is a great mindset to have from one perspective (leave cash in the business, don’t use your company as a personal piggy bank), I’ve seen from a different point of view how this may set you up for failure later.
Here are three reasons why you need to take money from your business.
Without a clear salary allocation, you are more likely to dip from your business accounts when personal needs arise.
In the initial months and years, a lot will change with your business (and likely with your personal life as well). Many business owners find it all too easy to pull cash out of the company or use company credit cards to support small things, like groceries, unforeseen expenses, or bigger items, like buying a car.
While you can make an argument for why these could be justified as “business expenses,” the reality is you are robbing yourself and your company when you take funds from your business.
Lack of salary can lead to more stress.
When you take a salary, even if you don’t spend the money, you are alleviating an avenue of mental stress. Most people get stressed when they are unclear about their money; it is human nature for many. When you draw a salary of $60K, for example, you can choose to spend it or bank that amount into savings if you don’t think you’ll need to use it.
Or, you can choose to reinvest a portion of it back into the business at the end of the year if you want.
Either way, tapping salary funds that are already budgeted is an easier situation than trying to justify a questionable withdrawal from the business.
Personal expenses are more likely to show on your tax return as business expenses, lowering your taxable payment.
Sounds like a good thing, right? Well, it simply is one of the worst things you can do as a business owner. I could go on for days about why this is a novice mistake that many new entrepreneurs make, but I’ll try to keep this brief.
I spoke with a business broker recently who has been selling businesses for over 30 years. He said for every dollar business owners think they are sparing themselves in tax payments by overreporting their expenses, they are really costing themselves between $30 and $50 dollars in leverage over the life of the company.
Why? You will always be judged by your tax returns and profitability when you need a loan, are looking for a partner, or are considering selling your business. This means you want to show that you are profitable and aren’t pocketing company cash for personal use. Avoid the temptation of skipping out on taxes your business owes; it may come back to haunt you later.
Showing that you are taking a clean salary will also allow you to budget for your personal needs outside of the business monies and will also better separate your true business expenses from personal ones.
Outside of tax season, you’ll want a clean separation — personal versus business funds — for effective cost management and targets for reducing your operating expenditures so you can increase your profitability. It will also keep you from stressing over personal financial shortages.
Within tax season, you want to have to pay Uncle Sam. It shows you are a business owner with integrity and that you know how to run a profitable business — which will be invaluable to you in almost every scenario in your company’s future.
So go ahead, and budget for a startup salary, and make sure it’s one you could actually live on. Paying yourself fairly will benefit you and your company.
Plus, as a business owner, you definitely have earned your paycheck! You work hard, so allow yourself to enjoy the benefits of that effort.