Building a business from the ground up is an exhilarating endeavor that comes with a number of decisions: the name of the company, whom you should hire, where you’re headquartered. But there is one question that many entrepreneurs don’t consider until things are already in motion: what are you worth? How much should you really pay yourself for owning and running the place?
Unfortunately, there’s not a magic answer. There are actually a number of approaches business owners take in determining their salary—it all depends on several factors, including the size of the business, the owners’ determination to re-invest in the company, and the amount of debt owed.
Many financial experts, including the U.S. Small Business Administration (SBA), recommend following one of the following approaches:
- Pay yourself what others in the field earn. This means doing a little research (the SBA’s income statistics page is a good place to start) and finding out what similar business owners are earning. Take into consideration the cost of living in your area—the salary of a bakery owner in a small town in Indiana won’t necessarily be equivalent to one in downtown San Francisco. Don’t be discouraged if your business is new and you can’t pay yourself the regional average yet. Just make sure you know what that number is.
- Set your salary as a percentage of the business’ profits. This tactic works best if your company has shown that it can turn a high profit. According to the SBA, most small business owners who take this route pay themselves 50% of the profits at most.
- Take enough to pay off bills and debt. After making responsible decisions about paying the mortgage, employee salaries, and utilities, any extra income can be directly re-invested in the company. This may work best for new business owners or companies with a low profit return.
- Set an hourly rate and keep track of those hours. Some owners feel shy about paying themselves for 70-hour workweeks after a lifetime of clocking out at 40 hours, but this is a hesitation that needs to be shaken. If you’re the owner of a business, you’re likely going to be putting in some long weeks—and some short ones—so don’t be shy about compensating yourself for what you work, even if your salary seems bigger than your employees’.
- Take home the leftovers. Many business owners sit down at the end of the month and pay the necessary bills, set aside money for taxes, and take home whatever is left. The surprise element of this can be fun—and can serve as extra motivation for running a successful, profitable company—but not everyone feels comfortable with an unpredictable paycheck month to month.
Do whatever feels right for you and your company, and don’t be afraid to try a couple of different tactics—as your business grows and expands, so will your perspective as an owner and entrepreneur.