How to Pay Yourself as a Founder Without Jeopardizing Your Business
You started your business with big dreams—but let’s be honest, working for free wasn’t part of the plan. Yet, many entrepreneurs and business owners struggle with the same question: How do I pay myself without putting my business at risk?
The truth is, paying yourself isn’t just a luxury—it’s a necessity. If you’re not compensating yourself for your hard work, you’re setting your business (and your personal finances) up for failure.
The key is finding the balance between rewarding yourself and keeping your business afloat.
Here’s how to pay yourself as a founder—without jeopardizing your business’s future.
Step 1: Choose the Right Business Structure
How you pay yourself depends on your business’s legal structure. Each entity type has its own rules for owner compensation, so it’s important to know where you stand.Here’s the breakdown:
Sole Proprietorship or Single-Member LLC: You’re paid through an owner’s draw—essentially, you pull money from your business’s profits.
S Corporation: You’re required to pay yourself a reasonable salary as an employee. Any additional profits can be distributed as dividends, which may have tax advantages.
C Corporation: You’ll pay yourself a salary and may also take dividends, depending on your business’s profitability.
Pro Tip: Consult a CPA or business attorney to make sure your compensation plan aligns with your business structure and tax obligations.
Step 2: Determine Your Payment Method
Now that you know how your business structure affects your compensation, it’s time to decide how you’ll actually pay yourself. There are two common methods:
1. Owner’s Draw
An owner’s draw is a flexible way to withdraw money from your business account. It’s ideal for sole proprietors, single-member LLCs, and partnerships.
The Pros:
No formal payroll system required.
You can adjust your draw based on your business’s cash flow.
The Cons:
Draws aren’t taxed upfront, so you’ll need to set aside money for taxes.
Inconsistent draws can make personal budgeting tricky.
2. Salary
Paying yourself a salary means running payroll and receiving a regular paycheck. This is required for S Corporations and C Corporations, but some LLCs and sole proprietors also choose this method for simplicity.
The Pros:
Taxes are withheld automatically, reducing surprises at tax time.
Consistent paychecks make personal budgeting easier.
The Cons:
Requires a payroll system, which adds complexity and cost.
You’ll need to commit to paying the same amount regularly, even during slow months.
Pro Tip: If your business is new or cash flow is inconsistent, start with a modest owner’s draw and switch to a salary once your finances stabilize.
Step 3: Decide How Much to Pay Yourself
Here’s the million-dollar question: How much should you actually pay yourself? The answer depends on three key factors:
1. Your Business’s Financial Health
Your salary or draw should never drain your business’s cash reserves or prevent you from covering operating expenses. Use your financial statements (profit and loss, cash flow, balance sheet) to determine what’s realistic.
Rule of Thumb: Start by paying yourself 30–50% of your business’s profits, depending on your personal needs and business goals.
2. Your Personal Expenses
Your business exists to support you, so factor in your personal financial needs. Calculate your monthly living expenses and use that as a baseline for your compensation.
3. Industry Standards
If you’re paying yourself a salary, it needs to be “reasonable” according to the IRS—especially if you’re an S Corporation. Research what similar business owners in your industry pay themselves to stay compliant.
Pro Tip: If your business isn’t profitable yet, consider taking a minimal salary or draw while reinvesting the rest into growth. Just make sure you’re covering your personal expenses.
Step 4: Keep Business and Personal Finances Separate
It’s tempting to dip into your business account whenever you’re short on cash, but this is a slippery slope. Mixing personal and business finances creates confusion, makes bookkeeping a nightmare, and could lead to legal issues.
How to Stay Organized:
Use separate bank accounts for business and personal funds.
Transfer your salary or draw to your personal account, rather than spending directly from the business.
Track all transactions in accounting software like QuickBooks or Xero.
Pro Tip: Avoid “borrowing” from your business account unless you’ve set up a formal repayment plan.
Step 5: Reassess Regularly
Your business’s financial health will evolve over time, and your compensation should evolve with it. What worked in year one might not make sense in year three, so schedule regular check-ins to reassess your pay.
What to Review:
Is your business consistently profitable? If yes, consider increasing your salary or draw.
Are your personal financial needs changing? Adjust your compensation to reflect new expenses or goals.
Are you reinvesting enough in your business? Make sure your pay isn’t limiting growth opportunities.
Pro Tip: Revisit your compensation plan quarterly or annually, and always consult with your accountant before making big changes.
Final Thoughts: Paying Yourself Is Essential
As a business owner, paying yourself isn’t selfish—it’s smart. You’re not just an entrepreneur; you’re an employee of your business, and you deserve to be compensated for your hard work.
By choosing the right structure, method, and amount, you can pay yourself sustainably while keeping your business on solid financial ground. Remember: A healthy business starts with a healthy founder, and that includes financial well-being. So, stop putting yourself last on the list.
Pay yourself what you’re worth—and watch your business thrive because of it.
