How Does Your Business Pay Its Owners?

by Rino Abdulah Mei 11, 2023 Posting Komentar

What Entrepreneurs Should Pay Themselves WSJ from www.wsj.com

Introduction

When you start a business, one of the most important things to consider is how you will be compensated for your work. As a business owner, you may receive income from several sources, including your salary, profits, and dividends. In this article, we will discuss the different ways businesses pay their owners and how to choose the right compensation structure for your business.

Salary

A salary is a fixed amount of money paid to an employee on a regular basis. As a business owner, you can pay yourself a salary for the work you do for your business. This compensation structure is common for businesses that have employees and need to maintain a consistent payroll. When setting your salary, consider your experience, the industry standard, and your business's financial situation.

Profit-Sharing

Another way for business owners to receive compensation is through profit-sharing. This structure allows owners to receive a portion of the company's profits based on their ownership stake in the business. Profit-sharing can motivate owners to work harder to increase profits, as their compensation is directly tied to the company's success. However, profit-sharing can be unpredictable, as profits can fluctuate from year to year.

Dividends

Dividends are payments made to shareholders as a portion of the company's profits. As a business owner, you can receive dividends based on your ownership stake in the company. Dividends are often paid out on a regular basis and can provide a steady stream of income for owners. However, businesses may choose not to pay dividends if they need to reinvest profits into the company.

Retained Earnings

Retained earnings are profits that a business chooses to keep instead of distributing as dividends or profit-sharing. These earnings can be reinvested into the company to fund expansion or pay off debt. As a business owner, you can benefit from retained earnings by increasing the value of your ownership stake in the company. However, retained earnings do not provide immediate income for owners.

Choosing the Right Compensation Structure

When choosing a compensation structure for your business, consider your financial goals, tax implications, and ownership structure. If you have employees, you may need to maintain a consistent payroll and choose a salary structure. If you want to motivate owners to increase profits, profit-sharing may be the right choice. Dividends can provide a steady stream of income for owners, but may not be feasible if the company needs to reinvest profits.

Conclusion

In conclusion, there are several ways for business owners to receive compensation, including salary, profit-sharing, dividends, and retained earnings. Each compensation structure has its own benefits and drawbacks. When choosing a compensation structure, consider your financial goals, tax implications, and ownership structure. By choosing the right compensation structure, you can ensure that you and your business are financially stable and successful.