When and how do you reward yourself?


6

(Note: I maintain a complete "firewall" between company and personal money, and the only way money goes through is with salary, loans, investments, or dividends.)

When I took the plunge a few years ago and set-up shop, I started myself off with a minimal salary. It was a 70% paycut from my previous job, less than what I made in my first job, and was just enough to pay the mortgage, bills, and put a little into personal savings. I believe it was the right decision at the time and my quality of life really didn't suffer since I've always been a frugal guy.

To this day, I haven't given myself a raise. The companies are doing well enough, but I don't (personally) need more money, since my living expenses will stay about the same for the foreseeable future. Plus, I feel like the money would be better off with the company (either to mitigate risk or invest in more employees) than in my hands (to buy little things I don't really need like Cable TV, or 5 more degrees on the thermostat in the winter).

Obviously, there are some things I'd love to have (for example, that 105"-screen home theater, which I also don't need), but they're all in the $10K+ range, which is a fairly significant chunk of change, both personally and for a business. It just doesn't "feel" right to write myself a 5-figure check when that money could go towards all sorts of business investments (marketing campaign, new website, etc.)

So my questionset is... how do you (or plan to) reward yourself? A carrot for meeting a particular goal? Big chunk of change or a raise? Do you wait until a certain revenue figure ($1M+)? Do you take a percentage of the year's profit and keep the rest as retained earnings (for the next year's expansion)? How do you reconile the fact that the big bucks you spend on an "extravagent" reward could very well be needed later to save the company in dire straits? Etc? And so on?

Motivation Salary Personal

asked Oct 29 '09 at 09:09
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Alex Papadimoulis
5,901 points

2 Answers


3

Certainly, I think the "rewards" should not put the company at risk in any non-trivial way. So, relative to the question of dire straits being inflicted, this can be avoided by concluding that the money coming out of the company has been assessed as being wastful or under utilized if left in the company.

If there are excess profits floating around and you are paying yourself under market rate, my first inclination should be to fix that. Unless the company can't afford to pay you market rates for your responsibilities, I see no particular reason to underpay yourself except perhaps to get favorable tax treatment in some way. In other words, a success metric of a business in my mind is that it can pay all of its employees fairly.

Relative to tax treatments, I think that is key to any particular rewards being contemplated. Note that for the most part, paying dividends to bonus yourself or others is a bad idea. The company is getting taxed on the income and the receivers are getting taxed on it as well. (ie: Double taxation). Generally speaking, giving raises or paying a bonus is a more effect way to distribute money as in most cases the money is fully tax deductible to the company and you only have ordinary income taxes on it at the personal level.

Of course, the best way (from a tax situation) to extract rewards is to sell some of your shares in the company to somebody else. These can be shares received through some sort of incentive stock option (ISO) program with certain vesting schedules, etc. or even some of your founder's shares. As the enterprise starts to get to a non-trivial size, all your profits in this regard is (likely) long term capital gains and is a significantly tax advantaged way to diversify your holdings and to take "profits" from your hard labor. Clearly, this path has some disadvantages depending on the stock capitalization structure of the business and who you like or not like to have as co-owners, but it is a very efficient way to get significant liquidity from the business.

WARNING: I am not a tax attorney and I am only providing an opinion - not tax advice.

answered Oct 29 '09 at 09:46
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Tall Jeff
1,406 points
  • +1 good advice; I should have also noted that, since we're LLC/S-corp, they're not "real" dividends (C-corp style) but more owners draw (which doesn't get hit by payroll taxes); but, I think of them the say way. – Alex Papadimoulis 7 years ago
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1

I don't think this is really a question of "rewarding yourself" but rather a practical issue.

Unless I need the cash in the company account to maintain reserves or for a specific investment, I always draw the majority of profits above my salary out of the company at the end of each year.

Regarding the company being "in dire straits", you can always lend money back to the company should an emergency arise or keep an open line of credit.

As an S-Corp you are getting taxed on it anyway so keeping it in the company yields no benefit while you have a number of tax-advantaged investment options as an individual (e.g. an IRA).

You may also consider creating a company 401k plan as a nice way to get cash out. I have been using the ING Direct Sharebuilder 401k plan and have been pretty happy with it.

I understand why you may be hesitant to give yourself a raise for tax reasons but if you pay yourself below market rates when the company is profitable, you may be creating an issue with the IRS -- speak with your accountant about that.

answered Oct 29 '09 at 17:27
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Oleg Barshay
2,091 points

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