How To Pay Yourself as a Small Business Owner [LLC, Sole Proprietor, S-Corp]

okay here are the exact steps to pay yourself as a small business owner look this is going to be an important video for all entrepreneurs out there because working for yourself means paying yourself from your business hey i own a business now but how do i pay myself so i created this video as the guide on the absolute best way to pay yourself as a small business owner we're going to be answering three questions today how to pay yourself how much to pay yourself and when to pay yourself and by the end of this video you will have the knowledge to pay yourself properly and profitably no matter the size or type of business you have so let's get into it okay the first thing i want you to know is when to pay yourself here's a stat 90 of businesses fail and not because they have a bad business idea ninety percent of businesses fail because they run out of cash and yes you can be profitable and still fail as a business because cash fuels your business like gas fuels a car and without enough cash staying in your business you can't perform day-to-day activities let alone plan for the future and many business owners make the fatal mistake of pulling cash out of their business too early i mean before they can cover expenses let alone plan for growth heck even tesla at one point almost ran out of money and was this close to going bankrupt elon musk and tesla was running out of money so here's the formula i've used since 2011 that has allowed me to grow a company to be an inc 5000 company with over 50 employees and allow me to enjoy the fruits of my labor the first thing you have to do is leave three months of expenses in your bank account look i'm talking actual cash and not accounts receivable if your customers don't pay you for three months can you survive if we experience another economic downturn or pandemic can you survive the three months of reserves acts as a cushion for your business in case of economic downturn or just poor sales but not only that that three months of expenses that you keep in your bank account gives you peace of mind to know that you can deal with those things and allows you to pivot if necessary okay the second thing i want you to do is to set aside money for your goals this is one of the things i call it ongoing fun that'll change over time but it's there for things like marketing hiring employees pivoting your business idea new tools new tech this is also one of those things that i want you to have in cash not accounts receivable to ensure that your business not only survives but prospers and lastly pay yourself with the remainder now that your priorities and your business's future is covered you can pay yourself what's left this amount would be the access cash that you can pay out to yourself or to your partners via a dividend based on the equity holdings in the company look as the saying goes it's not personal it's business so you take care of your business first and your business will take care of you okay now that we know when to pay ourselves as a small business owner let's talk about how to pay ourselves as a small business owner in general there are two ways to pay yourself and you're going to choose either or depending on your business type the first way to pay yourself is via something called an owner's draw or a dividend with an owner's draw you're simply drawing cash from the businesses profits to your personal bank account and this is something you can do on an as needed basis and you are able to draw up to the amount you put into the company something called your owner's equity and while you don't have to pay taxes immediately when you do an owner's draw you should be setting funds aside for those taxes and be budgeting for that tax bill that you know will come because trust me it always does the owner's draw is the most popular form of payment amongst small business owners the irs sees sole proprietors partners and llc's as self-employed and basically not paid with regular wages and if your company is in s corp you have the option of taking the owner's draw on top of your regular salary now the second way to pay yourself is with a salary with the salary aka w2 wages you are paid on a recurring basis like any other employee and therefore taxes are taken from your check and paid to state and federal governments this form of payment is required if you are a corporation an s-corp or an llc that is choosing to be taxed as a corporation and you should note that if you own a corporation and are in the day-to-day activities then you must have a salary and that salary must be reasonable meaning that even as an owner your salary should be reasonable to someone in your position in other words you can't pay yourself a dollar in salary and then decide to take the rest and dividend so this begs the question should you pay yourself via an owner's draw or a salary well sole proprietors partnerships and llc's are taxed based on profits regardless of whether cash is distributed or not so with that in mind taxes would generally not be a reason to choose a salary as your form of payment unless you want taxes taken out now instead of later and want to deal with the headache of payroll but remember if you're an escort a corporation or an llc choosing to be taxed as a corporation you do have to take a salary but whether you choose to take an owner's drawer or salary i want you to make sure that you're budgeting to replace yourself and your salary in your margins unless you plan to work in your business until the day you die you want to make sure that your business remains profitable with you out of the picture now here's a quick note on reasonable compensation as mentioned if you're structured as an s corp a c corp or llc tax as a corporation then you must be paid with the salary and that salary must be reasonable so you may be wondering what is considered a reasonable salary well here are a few things i want you to consider first the duties performed by you second the volume of business that you handle third the character and amount of your responsibility the complexities of your business the amount of time required the cost of living required the pay compared to the gross profits and net income of the business and your specific policy regarding pay now let's plan for success many entrepreneurs won't be able to take money out of their business in the early stages but once you have good footing and reasonable expectations of profit consistently start paying yourself even if it's a small amount you want to make sure that you can pay yourself profitably and it's within your margins also remember that taxes are to be paid quarterly when businesses make money so plan to pay taxes your accountant or your cpa should be able to help you and remind you of this and also most payroll providers also remind you of quarterly taxes the more you plan the more you succeed and by watching this video you are already on your way to success so as a recap we discussed that you should have three months of operating expenses in cash in your bank account you should set aside money for your future goals and lastly pay yourself with the rest you also have two options of paying yourself with an owner's draw or with salary an owner's draw is common among sole proprietors llc's and partnerships and paying yourself a salary is a legal requirement for s-corps c-corps and llcs choosing to be taxed as a corporation i'm going to place a few videos on the screen i think you should watch next but before i do go ahead and hit that like button for me it helps other entrepreneurs find this video on youtube and heck helps me out in the channel and subscribe to the channel for more information that helps you save on taxes and build your business i'm quran from life accounting and i'll see you in the next video

Channel: LYFE Accounting

Views: 46,188

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Id: TTiNxH4fgoI

Length: 7min 58sec (478 seconds)

Published: Fri Apr 22 2022