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As a startup CEO, you may be worried about how your business spends its money and when you can pay yourself a salary. After all, the more you pay yourself, the less capital your business has to utilise. However, it is not healthy to deprive yourself of a sustainable salary so that you can inject most of the money into your business. This article will outline when, how much, and how to start paying yourself a salary as a startup founder.

When Should You Pay Yourself?

There are certain times when it is appropriate to start paying yourself a salary and times when a salary could negatively impact your business.

For example, you would not want to pay yourself a salary when your startup is still in the survival stages or making a loss.

The appropriate times to pay yourself are when:

  • you have been making a profit above the break-even point for one year;
  • tax obligations are lower – once you have moved from being a sole trader to a company taking a salary can provide tax advantages;
  • your startup is established in the market and making consistent sales;
  • the funding round for growth has been completed;
  • you have paid all your startup employees first; or
  • your company is starting to think about expansion – you should account for your salary in your business expenses before expanding to ensure your business can continue to support your salary payment.

How Much Should You Pay Yourself?

Many startup founders struggle with understanding the quantum of their salary. When paying yourself a salary, you need to leave enough money in the business to cover:

  • expenses;
  • rainy day funds – some extra cash to cover for unexpected business disruptions; and
  • reinvestment into the company for growth. 

Before you pay yourself, it is best to consult your company’s accountant to understand how much may be available.

You should also consider:

  • your business needs – ensure the health of the business will not be affected if you pay yourself a salary;
  • cash flow planning – check how much cash is available;
  • fundraising – you may need to raise capital for your startup before you can take a salary;
  • tax obligations on your proposed salary;
  • investor opinions – investors may feel a certain way about your salary; and
  • co-founder expectations – if you have a co-founder, they may also want a salary.

Most startup founders take a small salary to cover household living expenses. However, in the early stages of your startup, it is often better to start with a smaller salary and increase over time as your business grows. The rest of the cash goes towards the business, and you can take ‘bonus’ payments if there is extra cash.

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How to Pay Yourself

There are a couple of different ways to pay yourself in early-stage startups. Once you know when and how much to pay yourself, you can choose a specific way to pay yourself compensation. Some options are:

  • dividends;
  • salary; or
  • drawings.

Dividends

The company pays dividends to a shareholder from the after-tax profits of your startup. You will need to pay income tax on the dividend at your individual rate. Usually, it is best to keep your profits on the business for as long as possible to minimise the amount of income tax you need to pay when filing your individual tax return. However, before paying yourself a dividend, your company must pass the solvency test. Your company will pass the solvency test if, after payment of the dividend:

  • your company can pay its debts as they fall due; and
  • the value of assets is more than the value of liabilities (including contingent liabilities).

Note that dividends will typically be paid to all shareholders on a proportionate basis to their percentage holding in the company. So, a dividend may not be appropriate if the purpose of the payment is to reflect contribution to the business and its growth. 

Salary

If you do not want to pay yourself a dividend, you can pay yourself a regular salary and deduct pay as you earn tax (PAYE). However, suppose the yearly profit is less than what was budgeted and your salary puts the company in a loss. In this case, the excess tax will need to be paid by the shareholder on the salary, meaning your company must take a tax loss. To calculate your PAYE amount, you need to know your:

  • tax; and,
  • details of your salary for the pay period.

Drawings

Another option is to pay yourself through drawings. This is a common way to pay yourself and is not a salary or profit. Drawings are cash you can withdraw from the company bank account for your personal use. You will need to ensure you separately save enough money from your drawings to cover your income tax liability. 

Key Takeaways

You can start paying yourself a salary as a startup founder when your startup is stable financially, has passed the survival stages, and is looking towards growth. Your pay should be an amount that covers your household expenses and leaves your company in a good financial position. Before paying yourself, you may want to consider your company’s cash flows, investor opinions, and tax obligations. You can pay yourself through dividends, a salary, or drawings.

If you need help with paying yourself a salary, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

How can I pay myself through drawings?

You can pay yourself through drawings by withdrawing money from the company bank account for your personal use.

When should I pay myself a salary?

As a startup founder, you can start considering paying yourself a salary when your startup has passed its survival stages and is in a stable financial position. Your startup should be meeting a break-even point, making a profit consistently, and thinking about expanding before you start paying yourself a salary. 

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