In any new business, deciding on how much to pay yourself can certainly be a tricky question. There are two primary considerations to keep in made when making this decisions:
- The Business Aspect
- The Tax Aspect
Business aspect speaking, you’ll need to determine what number is going to adequately compensate you for your time, commitment, and investment, but is also going to be sustainable for the business long-term. Having a high salary means little if the business can’t afford to pay you. You’ll also need to think about the distribution of revenue to any other employees that you may have.
A good way to determine this is to look at how much funding you currently have an what your growth projections are and determine your salary based on that in light of your non-negotiable needs. You can certainly bump your salary as the business becomes more sustainable, but once you burn through your business’ initial capital, you’ll have to come up with other ways to pay for expenses associated with business growth—this goes back to ensuring the sustainability of the the business.
Tax perspective is another outlook to consider. Depending on how you formed your startup entity, there are potential different treatments of your salary for tax purposes that might influence where you choose to set it at. For an LLC, it is all going to be pass-thru income. This means that all of the profits and losses are going to pass through and be reported as income be the owners whether or not a salary was drawn. Here, a set salary has no effect on the taxes you pay.
Contrast this with an S Corporation election. Either an LLC or C Corp can elect to be treated as an S Corp. Under this model, the owner is paid a reasonable salary from the business as determined by comparable pay to others in the same position. Then anything above that amount is an owner’s distribution that is not subject to employment tax. This can result in significant tax savings for the owner.
Each of these scenarios can have different legal and accounting implications and you should talk with a professional about what makes the most sense based on the goals of your business. If you’d like a free 20 minute consultation with an experienced startup attorney, LawTrades can match you with someone in our vetted network to see how they might be able to assist you. We have helped over 1,000 startups and entrepreneurs with their legal needs.