It is a common assumption that as a business owner, you are able to pay yourself as much as you want, after all, it is your business. However, this is not always the case – and definitely not the most efficient way of paying yourself. There are several factors that go into how much a business owner gets paid which we will look at in this blog post.
Small business owners often refer to the payments taken from their businesses profits as their ‘salary’. The salary differs based on the company’s profits and any business partnerships involved.
Small business owners pay themselves based on how their business is structured which means each business is slightly different. Sole proprietors will pay themselves via a draw.
This means when you are self-employed, you don't take a salary. In order to get paid, you take “drawings” from the company. This means you will simply be paid from the business bank account and therefore will be taxed on profits made and you take the drawings after that.
These drawings can be taken at any point but these are not deductible in working out your businesses profits – you will have to pay tax on the profits through a self-assessment system.
Partnership owners pay themselves on guaranteed payment or distribution payments like sole proprietors. Both partners are taxed on the profits of the business and these profits are then split based on whatever the partnership’s agreement is. For each type of business, the owner’s ‘salary’ is generally taken from the businesses profits.
As a business owner, it is ultimately up to you how much you pay yourself. However, it is important to note that very successful businesses are founded on decisions which put the business’ future and profitability first.
When you a running a small business it’s quite unlikely that you are returning a large profit, so to give yourself a large salary could put the future of your business at risk. It is important to look at your businesses profit in depth before deciding what will pay your own salary and what will be invested back into the business.
In the beginning months of setting up a business, some company owners choose not to pay themselves at all as businesses often run at a loss. You might think by not paying yourself a salary is a good idea and profiting your business, but by choosing not to include your salary in the accounts can have an impact on future investment.
In some cases, it may seem appropriate to not take a paycheque from your business. For example, if the business is not making any profits and you cannot pay bills or even employees, then taking a salary for yourself may not be a priority.
It is always best to first consult a professional, like an accountant, when deciding how to pay yourself from your company profits.