Should you pay yourself a salary?

Most entrepreneurs have the habit of not paying themselves a fixed salary every month. I don't blame them and fully sympathise with their reasoning.

For example,
If you invested $100,000 in your own company and start paying yourself a S$2,000 salary, you would be taxed on this $2000 salary. Which is quite idiotic becos, the S$100K investment was already taxed once!

The other reason is, entrepreneurs can find tons of ways to use the money. Rather than pay their own salary, they should in fact use the money to purchase assets or pay for operating costs.

I am more often than not guilty of advising clients to pay themselves a salary. But why do I do so?

Aim of a business
Why do you set up a business?
To work yourself to death? To find a job for yourself, because you are too old to be hired?
No! Your ultimate aim is to breathe life into the business, thus earning you passive income.

Do I jest? No.

Differentiate the director from the shareholder

When you are a director of a company, you are essentially an employee. You are directly responsible for the day to day running of the company. You are paid a Directors' fee.

As an investor/businessmen, your aim is to one day relinquish the position of director to someone else. Yes, legally you can remain the director, but the "real" director will be a true employee.

A shareholder earns his income from the net profits of a company. Since companies issue dividends to its shareholders. The shareholder does not work for the company and yet gets paid for his investment.


Ultimately, a REAL businessman will collect his dues for his past efforts and the present efforts of his employees in the form of dividends.

So what are your considerations:

- Don't take a salary if,

1. If your salary is paid out of investment money
2. You cannot afford to pay your mandatory pension plan (CPF)
3. Your job is merely selling and NOT managing.
4. You don't need to pay Corporate tax (http://www.accountingbpo.com/taxnews.php)

- Do take a salary if,

1. You are doing more administrative matters OTHER than selling. In time, you will realise that the money is better spent outsourcing the admin work to a full timer or part-timer. You would rather PAY SOMEONE ELSE than do the admin work yourself!

2. You need to establish some sort of credit worthiness for yourself.

3. You are starting to manage and has gotten sales staff to do the selling.

4. When you have sufficient cash flow and can start "returning" your investment back to yourself.

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The main reason why a salary must be budgeted even though you do not intend to pay out these salaries is due to the fact that you have to KNOW what is the REAL cost of doing your business.

If you intend to build your company's portfolio of customers and clients, you CANNOT remain a one-man operation unit, you have to start employing.

Rather than NOT KNOW your true cost when pricing your products and services, which is a mistake alot of entrepreneurs make, it is better to buffer for an eventual hire of staff.

For example,

You are an IT programmer and your charge up rate is $30 per hour.

You can quote a project at lower than $30 if you are doing everything yourself. You have only one brain and a pair of hands, assuming that you will be occupied for a FULL MONTH, what would you do if 2 projects came by?

Assuming you take on the two extra jobs and subcontract it to your friends, they charging you $28 per hour (that's the market rate). Leaving you with a $2 profit per hour charged.

Have you made a profit? You will make an immediate loss IF you had not counted:

1. Management cost for the project
2. Incidental expenses
3. Interest costs - You may have to borrow to pay your subcontractors in advance first

You need to MAKE A PROFIT! So remember, always find out the "true" cost of running your business and bill accordingly and NOT according to the cost of a One man operation unit.