Reason to Start Own Business
One of the main reasons behind setting up your own business is to earn profits and even though it is an obvious fact, most of the entrepreneur faces with this question during his initial years of operation. Mainly because this question has multi-dimensions such as should you pay yourself just enough to keep going or should you be rewarded for your efforts early on or should you pay yourself from the revenue and while industry experts are in favor of keeping your pay at a conservative level for initial few years, there is no definite and concrete answer for the same yet because setting your own salary will depend on various factors such as your location, industry, profits and your expectation or how much you want to earn.
Factors Consider for Business Owner Paid Salary
Also as a business owner you have to ensure that you are neither underpaid nor overpaid and there are various factors one should consider before setting up remuneration for himself such as what can the business afford, what is your worth, what are your expectations and how much do you need to maintain your lifestyle.
If you are a novice in the business world and have just started your business, then chances of getting profit in the very same year is extremely less or may be nil. However, it doesn’t mean that you don’t have to pay yourself because even if the profit has not yet knocked at your door, you are putting your efforts and time in order to establish and run the business and thus you shall reward yourself for the same.
Rewarding yourself not only caters on financial level but also on emotional and personal level because it is a world known fact that money is a big cause of stress, which is very much not a desirable trait to run your business successfully. Underpaying your efforts, time and work you are putting in to your business can harm your productivity, decision making skills and mental peace.
As per the United Kingdom guidelines, you have the freedom to start your business either as a sole trader or a limited liability company or partnerships and while a percentage of entrepreneurs choose to start as a sole trader or in a partnership, majority of them opt for limited liability company mainly because of the protection it offers to its directors from any kind of liability towards company debts. As a limited liability company, you and the company are two separate legal entity and thus you, as a director of the same, is not liable to pay company’s debts or credits from your personal accounts unless the debt is because of your negligence, fraud or dishonesty.
However, you need to be careful while deciding on the salary or the wages for yourself and your fellow directors, if any because industry experts believe that putting yourself and other directors on the monthly wages or on the payroll with full salary is not a very efficient way of handling tax and will also end up eating a fair share of your cash reserve. Also as a company director, you are a separate entity from your company and the profits coming are not automatically going to you mainly because company as a separate legal entity has its own share of liabilities, assets and legal status and in order to have a clear picture of where you stand, you must remember the distinction of your role as a director and a shareholder i.e. as a director, you will be responsible for managing the company whereas as a shareholder, you own either a part or entire company entitling you to the business profits and gains made if the company is sold.
Paying Business owner Income
Paying yourself as business owner can be a complex thing to get your heads around, however with a little bit of guidance, planning and foresight you can set up a highly effective and tax-efficient way to pay yourself from your business and one can think about the below mentioned considerations:
You as the owner of your business can choose any of the above mentioned methods however the very first step you should take is to separate your personal and business expenses and make sure that there are different accounts for both. A clear and defined distinction between personal and business account is a must for you to determine if your business is profitable or not. Also while you decide to pay yourself, you must do so in a tax-efficient manner i.e. you must calculate if paying yourself as a business owner is worth bearing personal allowance for income tax £11,500 and the dividend allowance.
In order to not to overpay on tax, most of the business owners pay only a small salary through income tax and take more if required as dividends because as mentioned above, you will end up more tax in the case of PAYE and less in the case of dividends. However, not every situation is same so there is no common yardstick or benchmark to decide which method is best when it come to paying yourself as business owners so in order to take your best call, you must consult your accountant because he can provide you clear picture regarding company finances and your salary as well.