In 2018, Justin Bajan gave up a cushy six-figure job as a copywriter to launch his own ad agency, Familiar Creatures. It was a big change — he, his wife and three kids packed up their minivan and moved from Boston to Richmond, Virginia, where his business partner lived and where he used to work.
Although they had one client, a local brewery, it was far from certain whether this venture would work out or if he’d ever earn the kind of money he was used to making again.
Still, he couldn’t resist the entrepreneurial pull. “We saw there was an opportunity to work with a certain caliber of client, but without the outdated structure that most agencies exist within,” he says. “And I’d rather be doing something entrepreneurial and see where it goes and how it grows than be nice and comfortable with nothing to show for yourself.”
The business started off strong — one client quickly turned into two and he’s now working with five companies — but as it grew, he and his co-founder, Dustin Artz, started to think more about their salaries and whether they were taking too much out of the business.
They were splitting in half whatever they made, but they realized that if they were going to invest in marketing and hire staff (they now have two employees), they’d have to do something differently. “We couldn’t just divvy things up 50/50,” he says. “So we started taking way less than ever before. We gritted our teeth and hoped our wives would play along with the gamble of starting our own agency.”
What to pay yourself may be one of the most controversial issues for entrepreneurs. According to Payscale, U.S. small business owners make, on average, $70,300. However, many company founders take no salary in the first years of running a business, while others take so much that they have trouble scaling their business. In any case, paying yourself is complicated: How do you put a price on a job that requires you to do payroll, marketing, IT and everything in between?
Pay yourself something
Melanie Hopkins, founder of Finance Friend, a New York-based firm that helps entrepreneurs start and grow businesses, says there is no set formula on how business owners should pay themselves. Businesses vary by type, legal structure and other determinants that affect how much salary a business owner pays for services and expertise. Along with these considerations, every business has different operating costs.
“It’s tough,” she says. “It is the most important decision that many business owners forget to make. It’s difficult to pay yourself based on an informed decision that is right for both you and your business.”
Her main piece of advice, though, is that owners should pay themselves something. “People must be paid for their work,” she says. “They don’t, because they have a scarcity mentality and fear that even if they’ve budgeted and everything looks good, they have to keep money in the business bank account. Not paying yourself leads to burnout, so carving out even a modest monthly payment is essential.”
Deciding what salary figure to land on does take some work, starting with the creation of a personal budget. You need to determine how much you need to withdraw from the business to live on. “Be realistic about how much your life costs,” says Hopkins. “You want to pay yourself enough so that you can sustain the business and sustain your lifestyle.”
That’s what Mercedes Eckert did when she wanted to grow iShop, a business that teaches people how to become a mystery shopper — when people go into stores to, for instance, test a company’s customer service or see if a location is clean. When she started her Louisville-based company in 2015, she was taking 60% out of the business, leaving the rest in to cover taxes and some modest expenses.
Like Bajan, when she decided it was time to start spending more on marketing, she had to reassess how much she really needed to remove from the company. After reviewing her personal spending, she lowered her draw to 35% and started paying herself every week instead of about every two weeks. “What I was doing before was too much,” she says. “I felt like I needed to be smarter.”
Choosing a salary
Up until this month, Bajan and Artz had what Bajan admits is an odd way of paying themselves. At the end of each month, they would see how much money they needed to cover their personal expenses and then they’d write each other a check for that amount. While they made sure the draw was the same for both of them, the figure changed monthly. “Our wives’ salaries would cover some of it, but we both have mortgages, credit card payments and other myriad issues to pay for, so we’d cover whatever their salaries couldn’t cover,” he says.
In March, though, Familiar Creatures became an S Corp, which requires its owners to take a salary that’s comparable to what someone in their position would make elsewhere. The IRS doesn’t want people to pay themselves a small salary and then take the rest as dividends, which is taxed at a lower rate, says Hopkins.
Because of that change, Bajan and Artz had to determine an actual salary, one that they could pay themselves every two weeks. To do that, he looked at Glassdoor, a site where people anonymously post their salaries. The two co-founders call themselves creative directors, so they looked at what an ad agency creative director might make and took the lowest number they could find.
They also looked at how much they had taken out of the company over the previous year to see, on average, what they withdrew every month. They factored in taxes, too — how much could they tax as salary versus lower-taxed dividends?
“We never want to pay ourselves so low that we have to get more money from the business, but we don’t want to hurt our business by paying ourselves more than we can live with,” says Bajan. “It’s complicated.”
After all those calculations, they’re still taking a much lower salary than they did in their previous jobs. “I’m paying myself what I was paid five years ago,” he says, which is in the mid-five figures.
Give yourself a raise
Both Bajan and Eckert hope their salaries will grow over time, but Hopkins says that taking more out of the business is easier said than done. In many cases, business owners forget to increase their salaries, especially if they are paying themselves every couple of weeks versus just taking out what’s left over in the bank account at the end of the month. “You should be revisiting your salary,” she says. “You are your No. 1 employee.”
Eckert plans to continue paying herself about 35% of revenues. If revenues grow, then so too will her paycheck. “Based on my projections, if we hit our numbers, then I’ll be able to up my salary because the company will grow,” she says. “It gives me motivation to hit those goals.”
As for Bajan, he says that if his company has a great year, then he would like to take a little more for himself, though he’s not sure how much. It’s more likely that, at least for now, he’ll take only what he needs and nothing more. “Until my kids are wearing the same clothes every single day, we’ll keep putting money into the business,” he says. “It’s more fun to see me add an employee than to spend money on (renovating) my house.”
Culled from cnbc.com
