Entrepreneurs start businesses to make money. The biggest challenge is how to get the money out of the business without crippling its operations. The options are getting the money as a salary or dividend at the end of the trading year.
LLCs and businesses have to make strategic decisions at different stages in the life of the business. The structure of the business also determines how much you get and the intervals of paying yourself. The most important consideration is liquidity of the business to guarantee continued operation.
Funding the business
It is not automatic that the business you start will make money to pay you enough salary. Many investors will begin by pumping more money into the business than they get in the initial stages. The initial stages of a business require a huge sacrifice. The investors or entrepreneurs must set aside money to cater for expenses until the business is profitable. It is advisable to determine the salary of all employees, including the entrepreneur when setting the capital of any business.
In the initial stages, the salary comes from the capital designated for the business. It should have been included in the business plan and projects. It is based on the role each person, as an owner or worker, is playing in the business.
The salary may grow or shrink over time. If the business is an instant hit, you have every reason to draw a better salary. A commission-based structure is, therefore, a viable approach. It motivates the managers and owners to make the business more profitable.
The salary is a facilitation fee for the people working in the business. Whether you are the owner or have engaged other workers, compensation in the form of a salary helps you to meet your daily needs. If you have no house to come home to in the evening or clothes to wear to work, you cannot run a business effectively. You must factor in the salaries of all employees actively engaged in the business during planning.
Since salaries are pegged on productivity, you must find ways to improve your performance. Try using a productivity tool like a Kanban board that supports collaboration. You can tag team members, comment on cards, and receive notifications. It also provides metrics to help you assess the performance of individual team members.
Business draw depends on performance. It is the amount an investor or owner takes from the business in cash or kind. It is flexible and will depend on performance.
Draw depends on your capital share. It will be deducted from dividends or any other amount the business may desire to pay to shareholders or investors. An investor may plow back money into the business instead of taking it away to increase his share or improve liquidity.
Deciding on Salary or Draw
The ultimate decision on whether to use draw or salary depends on the business structure you have adopted. LLC and business owners qualify for draws with the accompanying tax benefits. However, other factors like the stage of the business determine how much and how you take money from a business. The most important element is to consider the liquidity of your business. Do not take too much or pay high salaries that stifle the growth of your business.
Part of business planning before commencement involves considering the salaries of people engaged in the business. As business owners or partners in LLC, review your compensation from time to time. It will help you to make the best decision that balances the interests of investors and the need to maintain liquidity for your business.