Paying self on start-up business
I'm a technical person, something is puzzling me.
Why do owners of business startups have to pay themselves when they're just starting a business?
It doesn't seem to make sense, because it's like one pocket going to the other.
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Consult your accountant on this but they don't have to pay themselves. – Karlson 12 years ago
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If you put the money in you probably won't but if you have money coming in then you should, so you can you know eat. – Zachary K 12 years ago
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@ZachInIsrael You don't need to pay yourself through your company to *eat*. Problem is with expensing it. – Karlson 12 years ago
4 Answers
Well, you don't have to pay yourself if you have money to support yourself without a salary. But some business adviser will tell you if you don't pay yourself, your are technically distorting your balance sheet.
For example, if your work is valued at 50K and you don't pay yourself for the work you did, your balance sheet will show 50K more in profit.
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True story. This is a distortion which many people overlook. – Steve Jones 12 years ago
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You are not distorting your balance sheet. You basically create a precedence for a tax authority to put penalties on you with a question of *How are you paying for your living expenses?* – Karlson 12 years ago
If it's an actual company, even if you own it, it's a separate entity to yourself. You can't just take money out of it like it's your own bank account. Mostly this is because you need to pay tax, you pay income tax while the company pays company tax (in Australia they are different rates, I don't know globally).
Typically it makes sense to take some money out of the business even if you don't need to. This is because with a progressive tax system, you might find that if you take 50k out, your tax rate is lower than the businesses tax rate... so it just makes sense financially.
I have tried to put this as simply as possible, but it's a pretty complicated topic and tax/company laws vary between countries. Really this is something to get an accountant to help with if you are needing to deal with it.
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Everything Joel says is correct in just about every country. To Expand on the separate entity portion: If you own an LLC, SCORP, or CCORP you are given a level of personal liability protection by the company, as it is it's own entity. IF you start dipping into the company money, you pierce the corporate veil and open yourself to all of the company's liability. By paying yourself, you get money out of the company, and still get that protection. You should really consult a CPA, they will help you legally structure things for the best tax benefits. – Bwasson 12 years ago
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Personal liability vs. corporate liability should be viewed separately from tax liability, because the LLC and S-Corp pass-through taxation option exists (even though corporate liability is separate, you are taxed on corporate income as if it were personal income). – Henry The Hengineer 12 years ago
You don't have to pay yourself. You can just keep any revenues on hand, which can be useful for long-range tax planning.
What Roosevelt says above about distorting the balance sheet is correct, because not paying yourself makes the business look better than it would if you did pay yourself the market rate. Most sophisticated investors get this, so it wouldn't be an issue. Ironically, I have seen investors on Dragons' Den (like Shark Tank) who say you shouldn't take a salary as it makes the business look bad.
For completeness' sake, I should also mention that even when starting up a company there may be money involved in addition to what you personally contributed as startup capital. This is particularly true for consulting-type enterprises where the company is earning some income early on from its first clients.
I see nothing wrong with distributing that wealth, in particular when keeping in mind the tax incentives mentioned by Joel and others.
