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Your business is not an ATM: 5 reasons to earn a salary as a business owner

How many business owners consider their business to be an endless fountain of money to fulfil any wish they have? If this is your idea, then it is time for the bubble to burst. For you to run a successful growing business, you need to reinvest into your company. You need to make sure you have enough money to cover all your business expenses including your salary. Yes, you are your business’ first employee. Here are five reasons why you need to earn a salary as a business owner.

1. Your business’ money is not yours

This is probably the most important idea to learn early in owning a business. The money you get into your business doesn’t belong to you. Most of it needs to be used to pay the business’ expenses. You need to use this money to pay for resources, salaries, rent, taxes and suppliers. You may make a profit but some of this money also needs to be paid back into your business to help reach growth goals and to save for a rainy day. This is not to say you can’t enjoy some of the profit but it is good to know that the majority of the money you make belongs to the business.

2. Growth takes money

When you started your business, you had grand dreams of being a leader in the market but to achieve this you need to invest in your business. By using all the money after you have paid your expenses, you will not have the means to build your business into the empire you dreamed of. Remember you need to put money away towards your ultimate small business dream.

3. Irregular payments cause stress

By setting yourself a salary, you have a regular income for your personal expenses.  You can then budget and plan for your personal goals. If you take out money haphazardly, you will have the stress every month of whether you can pay your personal expenses or not. By setting yourself a salary as part of the business’ budget, you will be more vested in reaching your company’s targets.

Irregular drawings may also put you on the taxman’s radar as they wonder what these irregular and, sometimes, large payments are for.

4. Taxes must be paid

Whether you are paid through dividends or salary, you will need to pay tax on the amount paid. Depending on the type of business you have registered these amounts can differ. We need to remember that dividends are not tax-free, and you will need to pay tax on the company’s profit as well as on the dividends paid out.

5. You don’t work for free

By not including your salary in the budget for your business, you are essentially saying that you work for the business for free. And though this may be true in the beginning when you use some personal money to start the business, as you grow you need to make sure you are being paid for the time and expertise you bring to your business. You wouldn’t work for an employer for years for free, so why would you do it when you are a business owner?

With these five reasons, we can see that earning a salary from your business can create fewer headaches in the long run for your business.

But how do you determine your salary? It is advised to contact a tax consultant or accountant to help you set up how you will be paid by your business.

There are two ways to consider when getting paid. You can set yourself an industry-standard salary for the position you hold in the business or you could get paid a percentage of the profits. With the percentage of the profits, you need to cap it at a certain amount so that you don’t cause cash flow problems for your business. When you start, you should look at your personal life and the expenses you have and make sure that these are at least covered by the salary you receive from the business.

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