The two major ways entrepreneurs can take compensation from their business is through draws or by receiving a paycheck. The type of entity in which their business is set up will determine which method can be used. In either case, entrepreneurs need to be careful not to shortchange themselves.
Especially if you’re running a service business, it’s easy to initially think you can do well with a similar hourly rate that you earned as an employee, but this isn’t the case. Here’s a quick list of five elements every entrepreneur should include in their compensation:
- Competitive pay
If you were doing the same work for a company that hired you, what would your pay be? Are you making at least market equivalent or better? A lot of times, as entrepreneurs, we tend to focus only on this piece of our compensation when we set our pricing, and that’s a big mistake. It’s only 75 percent of what our total pay needs to be.
- Profit
As an entrepreneur, you take extra risk when you own your own company, and you should compensate yourself accordingly. Your capital is tied up in your business and should be earning a good return in addition to your reasonable compensation.
- Benefits
Employees get vacations, health insurance, and bonuses; and you should too. This should be part of your compensation package as an entrepreneur.
- Taxes
Although our individual taxes are not deductible as business expenses, we need to compensate for them so that we’ll have enough cash for our living expenses. It’s a huge chunk too. We work about three and a half months every year just to pay for our taxes.
- Retirement plan
When you work for yourself, no one is going to fund your retirement for you. Although the Social Security program helps a lot of seniors, it’s up to you to set additional money aside for a comfortable future.
Complete Compensation
Your compensation should include all of these components. If it doesn’t and you feel like you can’t afford to pay yourself that much, then your pricing might not be reflecting all of these items correctly, you might have a volume problem, or your business model may need some adjusting.
It’s normal to take a smaller paycheck the first few years as we’re building our businesses, but if you’re still doing it after several years or constantly having cash flow issues, then something may be wrong.
Make sure your future is bright and financially secure by including all five components in your entrepreneur compensation. If you’d like our help in this area of your business, please reach out and let us know.
“First Paycheck” by Andy Nguyen is licensed under CC BY 2.0