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When Is the Right Time to Pay Yourself a Salary?
Starting a business often means putting yourself last in terms of financial priorities. However, there comes a point where you need to start earning a salary. Here are seven factors to consider when deciding if it’s the right time to pay yourself.
1. Break-even for one year
If your business is financially stable for at least one year after reaching break-even (which typically takes three to six months), you can start considering a salary. As long as you’ve taken care of personal financial obligations before starting your business, this period of financial restraint allows you to establish a strong foundation for your business and learn from emerging trends and sales cycles.
2. Tax advantages
If your business is set up as a sole proprietorship, your personal income and business income are intertwined for tax purposes. However, if you operate as an official corporation, paying yourself a salary can provide tax advantages by absorbing the company’s income and potentially lowering your corporate tax obligation. Consult with an accountant and tax expert to ensure compliance with tax laws.
3. Signaling your intentions
“[the CEO’s salary] goes to whether the mission of the company is to build something new, or just collect paychecks.” – Peter Thiel
Your salary as an entrepreneur sends a message about your company’s goals and values. This not only influences internal employees but also equity shareholders. Consider the impact of your salary on the perception of your company’s mission and dedication to building something new.
4. Securing funding for growth
If securing venture capital funding is a top priority, it’s advisable to delay paying yourself until you’ve secured the necessary financial support. However, when you do start paying yourself, it’s important to keep your salary modest. According to The Next Web, more than half of Silicon Valley entrepreneurs pay themselves less than $50,000 a year.
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I’m Andrew Brooks, a seasoned finance consultant from the USA and the mind behind phonenumber247.com.
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