How Business Owners Pay Themselves
Getting paid as business owners can be a bit tricky for a couple of reasons. Not only do you want to make sure that your company has all of the working capital that it needs, but you also want to make sure you are not breaking any regulations with your pay. This means that you will first need to understand what the different payment types are and which ones work the best for your business type.
Draw
A draw is a good way for sole proprietors or limited liability company owners to pay themselves. Since these types of companies are not considered separate from their owners for tax purposes, the ways in which the owners pay themselves show up on as a negative entry on the balance sheet but not on the profits and losses sheet. As a sole proprietor, you will be responsible for the taxes your company owes, but also entitled to all of the profits.
Guaranteed Payment
Business owners with a partnership can choose guaranteed payment as a way to pay themselves. In this type of business, you will be responsible for a share of the taxes depending on how much of the company you own. With a guaranteed payment, you will have a set dollar per hour determined and will have that show up in the profits and losses sheet. For instance, if you have a silent partner, but work forty hours a week yourself, then you can take a guaranteed payment for that forty hours and then split the remaining profits according to the partnership agreement.
Distribution
Another way that partnerships can pay themselves is through distribution. If you decide to make your company an S corp or a C corp, then distribution can be a good option as well. An S corporation passes the tax liability on to the owners whereas a C corporation will have the tax liability stay with the business itself. A distribution is a share of the profits and will show up on the balance sheet. Each partner will receive a predetermined percentage of the profits to either live off of or invest back into the company.
Salary
A salary is similar to a guaranteed payment but designed for S and C corporations instead of partnerships. With this method, you set an amount to be paid to yourself and any partners and take it off of the profits and losses sheet.
Business owners can choose a variety of company types as well as payment methods to ensure that they can make a living. It is a good idea to go over your business plan to determine which type will work the best for your needs.
