You may be asking yourself whether you should pay yourself or not. This question is dependent on several factors such as your business type, financial situation, and goals. Let’s examine whether you should be paying yourself and which options are best for your business.
Types Of Business Structures
When starting a business, there are many business structures you can choose from. Each business structure has its pros and cons, so make sure you choose the best one for your company.
There are four types of business structures that are most popular: sole proprietorships (partnerships), corporations, limited liability companies, and corporations. Let’s have a closer look at each one.
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Sole Proprietorship:
The simplest and most popular type of business structure is the sole proprietorship. This type of business is operated and owned by one person. The business is owned and managed by the owner. The owner is personally responsible for any debts or obligations the business may incur.
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Partnership:
A partnership is a business structure where two or more people manage the business together. Both the profits and the losses of the company are shared equally by the partners. Each partner is personally responsible for any obligations or debts the business incurs.
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Corporation:
A corporation is a legal entity that is independent of its owners. The corporation’s owners are not personally responsible for its obligations and debts. This type of business structure has many advantages such as limited liability protection, tax benefits, and easier access to capital. It does have some drawbacks, however, like the complexity of paperwork and compliance requirements.
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Limited Liability Company:
A limited liability company (LLC), a hybrid business structure, combines the best features of a partnership or sole proprietorship with the limited liability protection afforded by a corporation. LLCs are easy to set up and manage. They also allow their owners more control over how the business is run. For businesses looking to raise capital or go public, LLCs may not be the best choice.
Which Factors Decide if You Should Pay for Yourself
As a business owner, you’re always looking for ways to grow your company and make it more profitable. One way to do this is by paying yourself a salary. But how do you know if you should be paying yourself a salary? Here are some factors to consider:
- Your business size – You may not need to pay yourself a salary if you own a small business. To help your business grow, you can usually reinvest profits back into it. If you own a business that is established and large, you can pay yourself a salary to help you manage your finances better and ensure you are earning a steady income.
- Your role in business – This is another factor you should consider. It may not be practical to pay yourself a salary if you are the sole owner or employee. If you have employees, however, it may make sense to pay yourself a salary to show that you are committed to the company and motivate them to work harder.
- Your financial situation – When deciding whether to pay yourself a salary, it is important to consider your financial situation. A steady income from your job may be enough to cover the salary. If you rely solely on your company for your income, you may not need the extra money from a salary. However, it can help you ensure you have enough money to pay your daily expenses.
The type of business you work for will determine whether you get a salary.
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Using the Business Structure to Decide Whether You Pay Yourself
It is important to think about how you can best pay yourself when running your own business. Many tax rules and implications are depending on how you structure your business.
Sole proprietorships have the simplest structure and the easiest way to pay oneself. This is through a personal account. However, you won’t be able to withdraw money from your business at will. You’ll need to keep track of your income and expenses to make sure you don’t take more than you share.
Partnerships and LLCs can be a little more complicated. How you pay yourself will depend upon the agreement between the partners. Profits are usually distributed according to each partner’s share. However, it is important to speak with an accountant to ensure that everything is in order.
Corporations are the most complex business structures. There are many ways you can get paid as a shareholder. Dividends are the most popular method. These are calculated based on company profits. You can also receive a salary or other benefits from the corporation such as stock options.
It doesn’t matter what type of business structure you choose. An accountant will help you ensure you are paying yourself the best tax rate. You can save a lot of money by taking the time to learn the regulations and rules surrounding how you are compensated.
Different Ways You Can Get Paid as a Small Business Owner
You have a lot to do as a small business owner. You are responsible for the day-to-day operations of your small business. But you must also think about how you will pay yourself.
Small business owners have a variety of options when it comes time to pay themselves. These are some of the most sought-after:
- Drawings: Drawings can be used to take money from your bank account. Drawings are technically taking money from your business’s account, but that’s the main difference.
You can draw as often as you like (e.g., weekly, biweekly, or monthly), or only when you have to (e.g., for a major purchase).
Owners of sole proprietorships, partnerships, and LLCs receive drawings.
- Salary: A salary can be described as a regular paycheck paid by an employer. The only difference is that a salary is technically paid from the bank account of your business.
Salaries are usually paid monthly and are often subject to payroll taxes.
S-Corps and LLCs are the only business structures that allow owners of these businesses to receive a salary. If you are an LLC or S-Corp owner, you have the option to choose to receive a salary rather than distributions.
- Dividends: These are profits you have decided to pay yourself out of your business. Dividends are not subjected to payroll taxes, unlike salaries and drawings.
Dividends can either be paid regularly (e.g., quarterly, annually), or as required (e.g., when your company has a particularly successful year).
Businesses that are C-corporations often use this type of payment.
- Distributions: These are basically like taking money from your business’ profits. Distributions are not subject to dividends. Instead, they are subject to payroll taxes.
You can choose to have your distributions paid out monthly, quarterly, or whenever you are required to purchase large quantities of business equipment.
This is the most common type, which is the S corporation. Limited liability companies (LLCs), partnerships, and other business structures may also pay their owners via distributions.
- Loans: A loan is the same as a personal loan that you get from a bank. The only difference is that a loan is technically borrowing money from the bank account of your business.
You can borrow money to purchase equipment, and real estate or cover operational expenses such as salaries.
Usually, loans are paid back with interest over time.
The method you choose to pay yourself will depend on many factors such as the profit margins of your business and your financial position. Talk to your financial advisor or accountant to determine which method is best for you and your company.
Small business owners, typically sole proprietorships, may prefer to be paid through the profits of their business. But what happens if there is no profit? Here is where the number 5 above might come in handy. A business loan may be necessary to cover the salary of both the owner and their employees.
If you are looking to get a small business loan to cover the operating cost, then Progressive Business Capital may be able to help. We not only offer small business loans, but we also offer merchant cash advances, invoice factoring, business lines of credit, and fixed-rate loans. If one of these options interests you please give us a call at (800) 508-4532 or reach out to us via email at [email protected] to learn which option may work best for your business situation.
