Several people I know have decided to turn their entrepreneurial dreams into reality and have launched small companies—some alone, some with one or two business partners. Most aren’t taking a salary. What should entrepreneurs who are principal owners of a new business venture consider before they start paying themselves? And do they have to pay minority owners too?
Like most business issues, there isn’t a one-size-fits-all answer. Business pros suggest asking a few questions to help decide when and how to take a salary as a start-up entrepreneur.
How is your business structured? “Paying yourself as a startup owner is not just about setting the wage; legal issues also matter. Your entrepreneur’s salary strongly depends on your startup’s legal and tax structure,” says Maciej Kubiak, head of people at PhotoAiD. “So, identify your business structure and learn about the rules and regulations of taxation. Knowing if you are an LLC or a sole proprietorship company, you will plan your entrepreneurial salary in accordance with the law.”
While Dennis Shirshikov, finance professor at City University of New York—Queens College, and strategist at the real estate technology company and brokerage Awning.com, says the earlier entrepreneurs can start paying themselves the better, he stresses that ensuring there will be enough money to weather challenges is key. “They should have sufficient capital in the business to get through any regular downturns, or access to credit before processing their first payroll payment,” Shirshikov says.
Should I pay other owners? According to “How to Pay Yourself in an LLC” at legalzoom.com, it depends on the role owners play. In an LLC, for example, if all members participate equally in the operation of the business, you can’t pay one a salary and not the others. “However, if you are the only member that has a management role, you can pay yourself a salary without setting up salaries for the other participating LLC members,” the post explains.
Shirshikov advises paying passive minority owners after a return on investment calculation has been made. “If the business can earn a minority owner 15 percent on reinvested money, they may well forgo taking payment in exchange for a larger future payment instead,” he notes.
“If the minority owners are playing active roles in the business, they should be paid in line with their work and, of course, the overall salary structure of the venture,” adds Riley Beam, managing attorney at Douglas R. Beam, P.A. “If they are inactive, they can be paid according to the agreement drawn or the business policy agreed upon by all the partners—a strong reason why these issues must be ironed out well before taking on investors or partners in a business.”
(Kathleen Furore is a Chicago-based writer and editor who has covered personal finance and other business-related topics for a variety of trade and consumer publications. You can email her your career questions at [email protected].)
