How Much Should You Being Paying Yourself?

kelowna accountantsWhen running a business, it’s natural to want to do everything the “right” way the including figuring out how much you should be paying yourself as the business owner. Kelowna accountants are not unique when it comes to being inundated with this same question from long time business owners and startups:

How much should entrepreneurs pay themselves?

When somebody asks me this question, the short and easy answer I always give is, you can’t take out more than the company makes because you are going to kill the business. In the long run, a business will always fail if too much money is taken out.  The business will be undercapitalized.  Other than that rule, every owners situation is different.

Related: How Much Debt Is Too Much Debt?

 

Everyone Needs Enough To Livekelowna accountants

When you are designing and developing a plan for your business you need to know how much your family’s budget is. This largely dictates how much you will need to take out.  Matching your personal budget with draws from the business is an easy answer.

If you own 100% of the business, only take out what you need to live on and not any more than that.  This makes sense to keep personal taxes down and re-invest the profits to grow the business.  People often get scared thinking the money is at risk being left in the business but that helps your business become more successful. Building up resources within your company will make it stronger. This is surely a subject where most Kelowna accountants would be inclined to agree!  Having the right corporate structure will help protect your capital and wealth left in the business.

 

kelowna accountantsWhat Do You Do With The Money?

If it’s a mature or maturing business then it might be possible to take out more than what is necessary to live on.

Once you are successful and depending on your business and tax structure, you can strip funds out of an operating company and into a holding company to begin investing.

Saving is good but if you have the proper structure than you should be saving within your holding companies, not personally. It is a safer environment.

 

Working For Nothing

kelowna accountantsIf your spouse is employed outside the business, making a good living and you can leave 100% of the funds within the company, then you should. On a tax basis and a business basis, it could be the best decision.

A lot of times when I recommend owners do this they feel like they are working for nothing because they aren’t taking home a pay cheque. I have to talk with them about why it’s important to leave those funds in the company and discuss why it’s going to help them be more successful. After all, that’s the ultimate goal, isn’t it?  Wealth creation through growing the business.

Related: 4 Important Tax Tips To Handle Before New Year’s Eve

As an entrepreneur, what you really make is what the business makes. If I can show a business owner that by leaving the money inside the business they are able to grow and make their company more successful, I can generally help them get over the anxiety about not taking a pay cheque.  When they do not “need” the money to live on.

We’ve been trained over the years to expect a consistent pay cheque and that’s a really tough expectation to get over. Comfort feels good. That’s why it’s so comfortable.

When it comes to how much you should be paying yourself from your company, it’s truly different for everyone because everyone is in a different situation. As an entrepreneur, the size and success of the company you build is what really matters. Keep that in mind when you make your decision.

 

 

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