You may be the last on your list of creditors when you’re just starting a business, but at some stage, you’ve got to start earning yourself. Here are seven things to consider in order to determine if now is the right time to pay yourself a salary.
1. You’ve been better than “break even” for one year
Assuming you stashed enough cash to meet your fixed and necessary personal financial obligations (such as housing, utilities, and insurance) before launching your business, you’re one of its last financial priorities for at least one year from the time you reach “break even”—which generally takes at least three to six months to achieve, depending on overhead and your industry.
Though that level of restraint may mean living quite “lean” in your personal life for a while, doing so provides an opportunity to establish solid footing for your business as early as possible, so that you have at least one year to learn from the trends and sales cycles that will emerge once you’re past “break even.” With this history, you can accurately forecast business decisions and needs that will eventually drive growth going forward—which will, eventually, lead to a situation where you can potentially give yourself a raise.
2. When tax obligations deem it appropriate
If your business is established as a sole proprietorship, the money you make personally and through your business is essentially “one and the same” in the sense of tax obligations. But, if you’re established as an official corporation, taking a salary can present tax advantages, particularly if it essentially absorbs the income your company realizes, and potentially lowers your corporate tax obligation. Though you should involve the help of a knowledgeable accountant and small business tax law expert to ensure you are compliant with tax laws that pertain to salary and bonus amounts, paying yourself may mean paying slightly less to the IRS.
3. When you’ve sent the message you want to the outside world
[pullquote position=”left”] “[the CEO’s salary] goes to whether the mission of the company is to build something new, or just collect paychecks.” – Peter Thiel[/pullquote]
The famed venture capitalist Peter Thiel once declared that the salary an entrepreneur collects from their startup is about a lot more than dollars and cents—it sets the precedent for the guiding force behind the company, among both internal staffers and equity shareholders. When Thiel made that statement in 2008 at TechCrunch50, he said he even uses a startup CEO’s low salary as a proxy of sorts to determine whether an organization is poised to succeed: “It [the CEO’s salary] goes to whether the mission of the company is to build something new, or just collect paychecks.”
4. When you’ve raised the funding you need to grow
To Thiel’s point above, you’ll likely want to hold off on paying yourself if securing venture capital funding is among your top business goals. Once you generate the financial support of investors, it may be time to reward yourself with a salary.
But, think small: According to The Next Web, more than half of Silicon Valley entrepreneurs pay themselves less than $50,000 a year.
5. When you are confident you can and have paid everyone else
[pullquote position=”right”] “Ensure that everyone you employ and partner with is taken care of financially before you pay yourself.” [/pullquote]
Though you’re technically the “boss” and decision-maker, you also bear the burden of leadership, which means “taking one for the team” and ensuring that everyone you employ and partner with is taken care of financially before you pay yourself. If you don’t have the money to pay your employees and vendors who make running your business possible, it’s not the right time to pay yourself.
6. When you’re debating expansion
Although it can be exciting to see that you’re pulling in consistent monthly profits, don’t make the mistake of thinking you’re poised for expansion until you have accounted for a salary that accurately reflects your ability, time investment, and desired annual salary.
If you haven’t yet collected payment from your business, it’s time to pay yourself a salary. Once you account for that expense, you may realize that your business isn’t quite as profitable or ready for growth as you thought.
7. When there is no reason to leave cash in the business
[pullquote position=”left”] “The best time to take a salary is a unique circumstance that you should determine based on your business itself.” [/pullquote]
Leaving cash in the business makes sense when your plan includes growth in some way shape or form, but if you’ve reached a point in your business’s life cycle where you can confidently sustain the desired revenue you want in light of your existing financial obligations, and there’s no investment or business-related reason not to be paid, it’s time to enjoy the fruits of your labor.
Owning a business requires plenty of “sweat equity,” and initially often results in working far harder than you’re being compensated for—and earning less than if you worked for someone else! While that doesn’t mean you have to work for free for the duration of your entrepreneurial life, the best time to take a salary is a unique circumstance that you should determine based on your business’s current financial stability, the goals you have for its future growth, and your own personal financial needs.
What made you determine it was time to start paying yourself a salary? Do you have any advice for other entrepreneurs? Share it in the comments below.