Life itself is only a vision – a dream…RSS
One of the basic rules of owning a small business has always been for the owner to pay him/herself a “market rate” salary. In a tough economy, though, many business owners are choosing to forgo paying themselves for the sake of the company. When given the choice between letting your dream sink or skipping a few paychecks, most business owners would choose the latter. It is not a permanent fix, but could be enough of a short-term pick-me-up to keep your company going in tough times. Take these things into consideration before you give yourself a broadsword style pay cut.
Rules Regarding Paying Yourself
There are very few rules regarding or regulating how much the owner(s) of a small sole proprietorship or simple partnership must take as a salary. The rule of thumb is to yourself the “going-rate” for a person in your industry. Many small businesses start off with the owner sacrificing their salary until they start seeing a return on their investment, but it would be impractical to not calculate your salary into your business plan. You didn’t start your own company so you would be toiling away making nothing for the rest of your life, so don’t assume it to be so in your business plan.
On the other hand, incorporated business owners are subject to stricter laws regarding their salaries. The owner is included as an employee of the company and must make “market rate” for a salary. A salary that is too high or too low runs the risk of drawing the attention of the IRS, which is whole new set of problems.
What are the Benefits?
In these tough economic times, small businesses are suffering under tightening pocketbooks. Banks and creditors are tightening their belts, and it is much more difficult for small businesses, which banks may deem “risky”, to get the capital they need for their future ventures. A temporary salary freeze is a good way for small business owners to generate the extra capital they need for growth. Think of it as investing in your investment. If your business succeeds, then you succeed. Foregoing a few paychecks to help your company meet its needs can be a necessary sacrifice for keeping your business “looking good” through tough times.
Maybe Not Zero
It may not necessary to stop paying yourself completely. Some business owners will just take a temporary pay cut to help free up some capital for the company. You still have personal financial responsibilities that you must still meet, so a pay cut may be the way to go. The credit of the company is tied directly into the owner’s credit, so make sure that you are still giving yourself enough money to keep up with your day-to-day expenses. If you damage your credit by not giving yourself enough money, it may damage your company’s possibilities for getting loans in the future. You may need money for advertising, but you really need money to pay your mortgage. Even if you could build a full-scale house out of business cards, you would still need money to pay property taxes.
What is the Risk?
Like any business decision, there are risks involved with not paying yourself a salary. Like I said, skipping paychecks is only a short term tool and should be used with discretion. If you are consistently skipping paychecks or are going long spans of time without paying yourself, you may need to look at your business plan and determine if there are any other places you can cut expenses. If there is still nothing you can do to get the capital you need, then you may have to consider the business a “loss” and move on. There is always the future and burying yourself in debt may hinder your prospects for starting another business in that future.