Some business owners pay themselves a salary, while others compensate themselves with an owner’s draw. But how do you know which one (or both) is right for you?
The question is a bit above my pay grade (see what I did there?), but Quickbooks has a terrific summary that provides perspective on some key questions including:
- What is owner’s equity?
- What’s possible based on my business structure? Whether you’re set up as an LLC, C Corp, Partnership, etc may determine your options for you. For instance, a partnership cannot pay owners a salary…the IRS won’t allow an owner of a partnership to also be an employee.
- What’s the right choice from a tax perspective…both for my company and for my personal taxes?
How an owner is comped (and how much) also comes into play when you’re ready to sell your business. If you are not paying yourself a market wage (either via draw or salary), the buyer will factor a fair market wage back into your business. After all, someone will need to be paid to do what you do after the sale.
We’ll continue to find and share content we find helpful for owners and sellers. Let us know what you think of this one, and feel free to drop us a note in the comments to let us know what what other topics are on your mind.
Quickbooks Blog: Salary vs. owner’s draw: How to pay yourself as a business owner – Article