Bootstrapping: should you pay yourself a salary or reinvest all profits back into the business?

Lets say you are bootstrapping your startup and generating a little revenue. Should you use that revenue to first pay yourself a salary or should all of the profits be re-invested back to fuel growth?

Congrats on getting revenue - big milestone for a startup.

If you have other sources of revenue to live on and don't NEED the money from the business to sustain your quality of life, reinvest as much of the revenue as you can into product development and a little bit of ongoing marketing. Of course you should reimburse yourself for any recent (current calendar year) out-of-pocket expenses and setup all payments from business accounts.

Investing into growth early on allows you to get to economy of scale faster. You have minimal required operational expenses that are constant regardless of size (hosting, accounting, software, etc.), so more revenue usually means higher profit margin.

Optional Reading:

Before you write yourself a check as either profit-share or salary consider these:

1. Max out on covering expenses first - equipment (computer upgrades, printer, etc.), software, online classes/training, books, etc. Any expenses that help/enable you work on your business should be paid for by the business. This strategy reduces profit and tax liability with it.

2. Consult with your accountant on the best way to get paid. If your company is an S-corp, your company profit passes through to your personal income and taxed at your personal income tax rate once. With a C-corp, you can be taxed on profit twice.

3. Becoming an employee of your company will cost the company extra 11-13% in payroll taxes, so very early one you might be better off taking money out as profit, but payroll tax can't be avoided for long and at a certain income level you will need to setup payroll or IRS will come after you. Google this topic further.

If you take money out as profit distribution during the year, put some money aside to pay taxes for it come tax season.

You should definitely pay yourself to cover your basic expenses first, and reinvest the rest. Building a startup under the clout of personal bills piling up will neither be good for you, nor the startup.