Even though they had a customer, a local brewery, it was far from certain if this company would work or if it would ever make the amount of money I was used to earning again. Despite the uncertainty, the business pull was too strong to resist. “We saw that there was an opportunity to work with a certain caliber of clients, but without the outdated structure that most agencies exist in,” he says. And I'd rather do something entrepreneurial and see where it goes and how it grows than be nice and comfortable with nothing to show for yourself.
Melanie Hopkins, founder of Finance Friend, a New York-based firm that helps entrepreneurs start and grow businesses, states that there is no set formula for how business owners should pay themselves. Businesses vary by type, legal structure, and other determinants that affect the amount of salary a business owner pays for services and experience. Along with these considerations, each company has different operating costs. Her main advice, however, is that landlords should pay something for themselves.
People should be paid for their work, Hopkins says. They don't, because they have a scarcity mentality and fear that, even if they have budgeted and everything looks good, they will have to save money in the company's bank account. Not paying yourself leads to burnout, so making even a modest monthly payment is essential. Deciding what salary figure to land on requires some work, starting with creating a personal budget.
You must determine how much you need to withdraw from business to live. Be realistic about how much your life costs, Hopkins advises. You want to pay yourself enough to be able to maintain the business and maintain your lifestyle. Like Bajan, when he decided it was time to start spending more on marketing, he had to reassess how much he really needed to eliminate from the company.
After reviewing her personal expenses, she lowered her draw to 35% and started paying herself every week instead of approximately every other week. “What I was doing before was too much,” he says. I felt like I needed to be smarter. Until this month, Bajan and Artz had what Bajan admits is a strange way of paying for themselves.
At the end of each month, they saw how much money they needed to cover their personal expenses, and then they would write a check for that amount. While they made sure that the draw was the same for both, the figure changed monthly. Their wives' salaries would cover some of this, but they both have mortgages, credit card payments and countless other problems to pay, so they would cover what their salaries can't cover, she says. However, in March, Familiar Creatures became an S corporation, requiring its owners to take a salary comparable to what someone in their position would earn elsewhere.
The IRS doesn't want people to pay each other a small salary and then take the rest as dividends, which is taxed at a lower rate, Hopkins explains. Because of that change, Bajan and Artz had to determine a real salary, one that they could pay themselves every two weeks. To do this, he looked at Glassdoor - a site where people anonymously post their salaries - and took the lowest number they could find for an advertising agency creative director (which is what they call themselves). After all those calculations were done, they continued to earn a much lower salary than in their previous jobs.
“I'm paying myself what I was paid five years ago” he says - which is in the middle of five figures - “but both Bajan and Eckert expect their salaries to increase over time”. However Hopkins states that getting more out of business is easier said than done; in many cases business owners forget to raise their salaries - especially if they pay themselves every other week instead of simply taking out what's left in the bank account at the end of the month. “You should check your salary” she says; Eckert plans to continue paying around 35% of revenues - if income grows then so will your paycheck; according to his projections if they reach their numbers he will be able to increase his salary because the company will grow - “it gives me motivation to achieve those goals” he says. As for Bajan he states that if his company has a big year then he would like to take a little more for himself - although he is not sure how much - “until my children wear the same clothes every day we will continue to put money into the business” he says.
It's important to keep in mind that most business owners receive only a modest weekly or monthly payment - enough to cover household living expenses - while the rest of the cash is left in business where it acts as an exchange to protect against a pause in income or unexpected business expenses; if cash reserves accumulate in the business then the owner could request additional “bonus” payments when money is scarce - but as your company's revenues stabilize paying for yourself becomes much more important. To give you a general idea below are three of...