A salary for the business owner or not?

She is earning a minimum wage and the business partner is of the opinion that as the majority shareholder he will receive dividends. The partner is not that involved in the business and receives a decent salary from his employer.

Her predicament led me to consider whether a business owner should draw a salary or not?

I understand that in the start-up phase, a salary is probably not possible, as every cent is invested back into the business. But the business owner must also eat!

Neglecting yourself has many consequences: if you do not service your own commitments, you will encounter problems down the line. Not being able to service your own commitments may lead to a feeling of disappointment in yourself and this may spill over into your closest relationships. Eventually, you will burn out and feel that the effort is not worth the sacrifice you are making.

Taking money from revenue as and when it comes in has its own problems, especially if you do not keep track of how much you’re taking. Or personal expenses are paid through the business account. Again, it has consequences. Mr. Taxman will demand his cut, either through income tax or dividend tax. Then most probably provisional tax every six months thereafter. A foreseeable expense the business will struggle to afford.

Another point to remember is that dividends get paid if the business is making a profit – and then only after company income tax has been paid.

When the opportunity, or need, arises to sell the business, the value of the business might not be what you expected. The intertwining of business and personal expenses will have investors frown upon the financial statements because they would want to know what the true reflection of the business is.

Business owners must differentiate between the business and themselves. The business is an entity by itself. You are not your business – you are only working for the business.

Paying yourself has benefits to the business and obviously to yourself.

The business can deduct the salary as an expense for the business, thus lowering the income tax. Investors will view business owners paying themselves as committed to the business (even if it is a small but steady amount). The added advantage is that the owner will be able to prove income when applying for credit. This disciplined approach may eliminate tax payments during the start-up period.

To build a salary into the business plan from the start will enable the business owner to feel valued and productivity will rise. The salary should rise as the business is growing.

Investors or buyers will scrutinize your salary (or drawings) to determine if it is reasonable for the size of the business. So, the question now is, what is reasonable? Here are some pointers to determine a reasonable amount:

• How much will a similar business pay for the work you are doing?
• What does the market offer for someone in your position?
• Is the salary in relation to your duties and do you perform the duties?
• Is the salary reasonable for the level of responsibility?
• Are you fairly compensated for the time you spend working in and on your business?
• Is the salary reasonable when compared to your employee’s salaries?

In the start-up phase determine what your basic needs are and have that met. When the business is more sustainable increase your salary and eventually you will be able to live the lifestyle, you envisaged for yourself. Be disciplined and do not kill the golden goose by taking too much money from the business.

The situation might be different for sole traders, sole traders are free to pay themselves whatever and whenever, as they are not responsible to shareholders. However, the same principles can be applied to grow a sustainable and successful business, regardless of the type of ownership.

Pay yourself! It is an added incentive. Everybody wants to be rewarded for hard work. Business owners must not see themselves as last in line. If the business is in financial distress, paying yourself an extensive amount will raise questions from employees, suppliers, financiers, and possible investors.

The conclusion I arrived at is that my friend should determine a reasonable salary for herself and pay herself as in the long term, both partners will reap the benefits.