An obvious early consideration in any business is how much income the owner(s) will receive from the business. It is understandable that until the business is profitable, you will take out only what you need to cover your basic living expenses. But I’m reminded by an Entrepreneur.com article about the importance of projecting your income expectations — beyond just getting by — into your Business Plan.
Many first-time business owners think of the business profit as their income, but that is unrealistic and it doesn’t help your business grow. It is tempting to think of moneys you will use to grow the business as expenses and whatever is left after expenses is for you, but it should be the other way around. Your salary should be an expense, and the accumulated profits from the business should be the capital you use to grow the business. So what should your salary be?
The Entrepreneur article provides excellent guidelines on projecting your salary. And it points out that “Determining your salary during the planning stages of startup is important because you need to include your income in the financial statements you will produce in order to obtain financing for your business. Even if you are financing the venture yourself, you need to have this information in front of you; otherwise, your overhead won’t be practical and any income, break-even and cash-flow projections you will perform will be inaccurate.”
The article makes another important point: “A lot of people fail to realize that when you’re self-employed, the legal form under which you operate your business directly affects the way the IRS views your tax status and, therefore, will have some bearing on how you pay yourself.”
I hope you have a financial advisor and will discuss this topic with her and your attorney as part of your business planning process.