A salary for the business owner or not?

A salary for the business owner or not?

I discussed with a friend complaining that she is working so many hours in the business and do not get compensated for the work she is doing. She gets up at 3:15 am to get everything done, and in peak times even goes a day or two without sleep. This is whilst she is still a mom and wife.

a woman using a calculator and a phone

Currently, she is earning a minimum wage and the business partner is of the opinion that as the majority shareholder, she will receive dividends. The partner is not that involved in the business and receives a fairly decent salary from his employer. So that obviously lets me consider if a business owner needs a salary or not. I agree when you are in the start-up phase a salary is probably the last thing on your mind because every cent is invested back in the business.

But the business owner must also eat!

Neglecting yourself has many consequences. In the beginning, if you do not service your own commitments, you will encounter problems. You will feel let down, by yourself, and that will spill over into your closest relationships. Eventually, you will be burnt out and feel that this is not worth it anymore.

Taking money from revenue as and when it comes in has its own problems, especially if you do not keep track of how much you’re taking. Or personal expenses are paid through the business account.

Again, it has consequences. Mr Taxman will demand his cut, either through income tax or dividend tax. Then most probably provisional tax every six months thereafter. An unforeseeable expense again and business owners cannot afford that. Another point to remember is that dividends only get paid if the business is making a profit, and then only after income tax, for the company, has been paid.

When the opportunity, or need, arises to sell the business, the value of the business might probably not be what you expected. The intertwining of business and personal expenses will have investors frown upon the financial statements because they would want to know what the true reflection of the business is.
Business owners must differentiate between the business and themselves. The business is an entity by itself. You are not your business; you are only working for the business.

That being said, paying yourself has benefits to the business and, obviously to yourself. The business can deduct the salary as an expense for the business, thus lowering the income tax. Investors will view business owners paying themselves as committed to the business. Even though it is a small but steady amount.

You will be able to prove income when applying for credit and in the process eliminated unexpected tax payments. Investors or buyers will scrutinize your salary or drawings to determine if it is reasonable for the size of the business. Building a salary into the business plan from the start will enable the business owner to feel valued, and productivity will rise. The salary should rise as the business is growing.

So, the question now is, what is reasonable? Here are some pointers to determine the reasonable amount:

  • How much will a similar business pay for the work you are doing?
  • What does the market offer for someone in your position?
  • Is the salary in relation to your duties and do you actually perform the duties?
  • Is the salary reasonable for the level of responsibility?
  • Are you fairly compensated for the time you spend working in and on your business?
  • Is the salary reasonable when compared to your employee’s salaries?

In the start-up phase determine what is your basic needs and have that met. When the business is more sustainable increase your salary and eventually, you will be able to live the lifestyle you envisaged for yourself. Be disciplined and do not kill the golden goose by taking too much money from the business.
The situation might be different for sole traders, sole traders are free to pay themselves whatever and whenever, as they are not responsible to shareholders. The principle can however be applied to grow a sustainable and successful business.

Pay yourself is an added incentive, everybody wants to be rewarded for hard work, even just a small amount in the beginning. Business owners must not see themselves as last in line, although a balanced approach should be followed. If the business is in financial distress, paying yourself an extensive amount will raise questions from employees, suppliers, financiers, and possible investors.

My conclusion then, my friend should determine a reasonable salary for herself, because both partners will reap the benefits in the long term.

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