Taking on the role of an entrepreneur can be both exciting and overwhelming. One of the most difficult decisions you’ll make as an entrepreneur is how much to pay yourself. It’s important to consider both the short-term and long-term effects of paying yourself too much or too little as you navigate the difficult waters of entrepreneurship.

What Is an Entrepreneur?

An entrepreneur is a person who starts and runs a business or other enterprise. This is someone who identifies a need or problem and creates a product or service to solve it — they’re a problem-solver, driver of innovation, and risk-taker.

What Are the Different Types of Entrepreneurs?

If you’re considering becoming an entrepreneur, it’s important to understand the different types of from which to choose. The 3 main types of entrepreneurs are:

  1. Solopreneur — A solopreneur runs their own business alone, without any help from employees or partners.

  2. Intrapreneur — An intrapreneur is an individual within an organization who takes on the role of entrepreneur. They take risks to develop and implement a new, innovative product or service.

  3. Partner — If you choose to do business with another person, you would be partners, each taking responsibility for the different aspects of running a business.

Considerations to Make Before Setting an Entrepreneur Salary

Before deciding on how much you’ll pay yourself as an entrepreneur, it’s important to consider a few key factors, including:

  1. Business expenses – First and foremost, you need to adequately cover your business’s fixed and variable costs, such as rent, equipment, supplies, taxes, materials, and more.

  2. Profit potential – You should also consider how much potential profit your business could make after accounting for your expenses.

  3. Personal financial goals – Think about what financial outcome you’d like to have for yourself and for your business in the short- and long-term.

  4. Lifestyle – Finally, you should factor in what kind of lifestyle you’d like to have. Will you need to save a certain amount each month to maintain your desired lifestyle?

How Much Should You Pay Yourself?

As tempting as it may be to give yourself a high salary, it’s important to remember that any salary you pay yourself will have to be reported and taxed for. Additionally, paying yourself a high salary means shrinking profits, which won’t help your business over the long-term.

Below are 3 tips to help you decide how much pay yourself as an entrepreneur:

  1. Estimate start-up costs in advance – Doing this will give you a better sense of how much cash flow you’ll need to sustain your operations.

  2. Set realistic salary goals – Break down your expected expenses to determine a salary that won’t overstretch your finances and that is realistic for your business.

  3. Don’t forget about taxes – Consider the self-employment tax rate, as well as any other taxes your business may be liable for, when setting your salary.

Alternatives to Paying Yourself a Salary

As an entrepreneur, you may decide not to pay yourself a salary and instead use profits to reinvest in your business. This option may sound appealing, but it will depend largely on the type of business you’re running and your long-term goals.

Below are some alternatives to paying yourself a salary:

  1. Bonus/profit sharing – Pay yourself when the business makes profit, which allows you to push profits back in to the business to ensure growth and sustainability.

  2. Dividends – Depending on the type of business you run, you may be able to pay yourself dividends on the profits.

  3. Owner’s draw – This is when the business pays your personal expenses instead of giving you a salary. The amount will be taxed, however, so be sure to also set aside funds to cover the tax burden.

What Can Affect Your Salary?

When deciding how much to pay yourself as an entrepreneur, there are a few external factors that could affect your salary, including:

  1. Industry – Different industries call for different startup costs.

  2. Location – The rent and other costs of doing business can vary significantly based on where the business is located.

  3. Growth stage – The costs of doing business can be far greater during the early, growth stages.

  4. Personal goals – Your lifestyle, personal goals, and whether you’re a solopreneur or partner will also help influence how much you pay yourself.

Just like any other job, determining an appropriate salary for yourself as an entrepreneur requires careful consideration. Before deciding on how much you should pay yourself, it’s important to take into account your business expenses, potential profit, personal financial goals, lifestyle, and more. It’s also important to understand your options for not paying yourself a salary, such as bonus/profit sharing and dividends, if you need to reinvest your profits back into the business.

Ultimately, all entrepreneurs should focus on creating a sustainable model that allows for growth and stability. By taking the steps to accurately assess your expenses, potential profits, and goals both for yourself and for your business, you’ll have a better sense of what to set your salary at.

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