Brad Nakase, Attorney
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Amanda has recently opened her own tea shop, where she offers teas, coffee, cakes, and sandwiches to the local community. While her business is doing well, making a good amount of revenue in its first year, Amanda is always concerned that one day it will run out of money. Because of this fear, Amanda has not been paying herself a salary, living only on personal savings. However, those savings are running low. Reluctantly, Amanda admits that she needs to finally pay herself a salary. However, she does not know how much to pay herself based on the performance of her company. She needs enough to cover her lifestyle, but wants to leave enough for the business to grow.
One of the most difficult decisions for a small business owner, especially one just starting out, is deciding what to pay themselves.
In fact, there is no established formula that can offer an answer to this question. Every business has its own type, legal structure, and other factors that determine how much a business owner should make as his or her salary. Also to be considered are the operating costs of the business. If the business is expensive to run, then the owner may not wish to take as large a salary, at least at first. Again, it will depend on the business. There is no one-size-fits-all answer.
It is generally advised that business owners pay themselves something. It may be tempting to avoid paying oneself to ensure that there is always money in the bank. However, this scarcity mentality may do more harm than good in the long run. When a business owner does not pay themselves, it can easily lead to exhaustion and burnout. There is no light at the end of the tunnel, and one can quickly become disenchanted with the business when there is no tangible proof of personal success. Therefore, taking a modest monthly payment is important. It should not be an enormous amount, obviously, but a reasonable salary that can pay for the cost of living.
Choosing what salary figure to pay oneself is not easy, and it requires creating a personal budget. A business owner should figure out what amount he or she needs to withdraw in order to afford the cost of living. It is important to be realistic about how much one’s life costs to support. Groceries, rent, childcare, healthcare, leisure – all these things must be factored into the decision. A business owner should pay themselves enough to support their lifestyle while also keeping the business running. This takes planning and, sometimes, compromise.
If a business owner feels that he or she is taking too much, they can always adjust the amount that they take. If, for instance, an owner would rather be paid less more often, this can be arranged. They would be paid every week rather than every two weeks. This arrangement may fit their lifestyle and budget better than being paid more bimonthly. It largely depends on the individual.
It may be tempting for a business owner to wait until the end of the month, calculate expenses, and then withdraw whatever money is needed. However, this is not the best practice, because the figure can change monthly. A better idea would be to consult a site like Glassdoor, where business owners post their salaries. A business owner should look at what other owners in their industry are paying themselves and use that as guidance. If most owners in that sector are paying themselves X-amount, then that is a good salary suggestion. If there is a wider range of salaries for owners in the industry, a small business owner should choose a number on the lower range.
While investing time in their business, it is easy for a business owner to forget to revisit their salary every now and again. For all their hard work, a business owner should not forget to raise their pay when appropriate. If the company’s revenues grow, then it is perfectly acceptable for the owner to raise their own salary in response. Having this model can also increase motivation, because there is a reward when goals are met.
But how much should the bonus or raise be? This comes down to the individual in the end. Most people prefer to take what they need and put the rest into the business. While frugality can help a growing business, enjoying the profits of one’s work is also important on occasion. As long as one exercises moderation, then there is no harm in taking a bonus or giving oneself a raise.
