How to Set your Salary as a Startup Business Owner
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Kevin McQuire quit his job in California and moved to Illinois in late 2000 to start a language translation company using $15,000 in savings. With health coverage and other benefits provided by his wife’ job, he saw no need to pay himself more than a modest salary, just above minimum wage.
As sales picked up in the spring of ’2001, the sacrifice seemed to be paying off – then was smacked down by the events of 9/11 and their effects on the economy. The McQuires lived on credit cards, a loan from a relative and lots of ramen noodle dinners.
“That first year was horrible,” says McQuire, president of Chicago-based Atlas Language Services, Inc. “There was nothing to pull from for salaries. We went without paychecks basically for a year.”
Now the business has grown and comfortably provides McQuire’s six-figure income from salary and disbursements, which he says is still below what he could earn in the open market. But he’s happy with his take-home pay, and finds even greater satisfaction in having built a company with an established reputation and repeat clients.
Tighten Your Belt
Success demands hard work, patience and sacrifice. It’s easier to get there when you have an employed spouse, generous investors or a fat savings cushion to get you through the financial stresses during the first years of a new business. But you may well have none of these.
Without a safety net, business owners must be prepared to live on low or no salary until their company turns a profit – which can take years. Some business owners rely on credit or loans, piling up debt that delays profits even more.
If living without an income isn’t an option, set your salary by thoroughly reviewing your personal spending habits and how much you need to support your (scaled back) lifestyle. But be conservative. As the boss, no matter how much experience you have, when the checks don’t come in, you don’t get paid.
“When we first started, we had no revenue coming in,” says Michael Alter, president of SurePayroll, Inc., in Glenview, Ill. “You pay your employees first and if there’s anything left, then you get that. That’s life as an entrepreneur.”
Focus on Long-Term Growth
Some entrepreneurs start a company with a distorted vision of making big money fast, and treat the business as a personal piggy bank. Overpaying yourself – especially in the early years – can drain revenue and contribute to the failure of your business. It can also trigger an audit by the IRS, which has won several lawsuits against corporations that violate its rules of fair and reasonable compensation.
Seasoned entrepreneurs know you either pay yourself or you reinvest in your business. You can’t do both. Being mindful of long-term growth is the difference between an employee and a true entrepreneur, says Clifford Schorer, professor and entrepreneur-in-residence at Columbia University’s Eugene M. Lang Center for Entrepreneurship.
“The business owner is looking for a longer term reward,” he says. “They want to build equity, wealth. An employee wants to support themselves by their salary. It’s a different mindset.”
And avoid the trap of comparing your salary to what you could make on the open market; that’s irrelevant in the face of sagging profits. Entrepreneurs need to be realistic and self-disciplined if they hope to achieve their long-term goals.
“The reward is not salary,” Schorer says. “It’s the growth of the company.”
Cash is King? Not Always
Your compensation can take various forms. Defer earnings until your company turns a profit – ownership is your dividend. Reward yourself with bonuses, stock options or commissions.
A business owner with a young family might trade off a big paycheck for a comprehensive health plan. And then there are costs that can be treated as business-related expenses – leasing a car, phone and utility bills, a percentage of your rent or mortgage payment for a home-based business, and more.
Or you might focus on minimizing your personal taxes. That’s what Nicolas Cianca did in the early years of launching his New York-based Lightbulb Solutions. After drawing a base pay of about $20,000, “at the end of the year, if there was money left over, that’s money that I’d try to put into an IRA, so I wouldn’t get hit with taxes on it,” he says.
Most importantly, hire a good accountant. A savvy tax professional can steer you through the maze of loopholes and pitfalls to maximize your income.
5 Tips for Setting your Salary
Veteran business owners suggest you consider these five tips before deciding the size of your own paycheck:
- Learn to live on less. Adjust your standard of living and plan to go without a regular salary for a year or more.
- Build enough capital to cover your costs. Financial pressure to survive can leak over and kill your personal life.
- Pay yourself with equity. Once your startup is established and profitable, you can pay yourself any deferred salary.
- Understand, there’s no fixed formula. Check your financial forecast. Set a percentage of profits, but not more than 50 percent, as your salary. Compare your salary to that of other entrepreneurs in your field.
- Don’t quit your day job. A regular paycheck will help keep startup debt to a minimum and avoid cutting into profits that could be used to grow your business. Use your evenings and weekends to launch, and gradually build your dream.