I wrote a blog post a couple of years ago titled “How Do I Pay Myself?”. I received a lot of feedback about that post, mostly from sole proprietors (or single-member LLC owners). I didn’t realize it at the time, but there is a lot of confusion about how you can compensate yourself when you can’t be on payroll.
In our Godwin Start-Up School program, we talk about compensation a lot. I find that most sole proprietors compensate themselves in one of two ways:
One of these ways is highly confusing. You get one guess. Go ahead….
You’re right! Option 2 is probably the most convenient for the owner, but confusing to everyone else analyzing the business records.
And here’s another thing…you’ve gone to this trouble of setting up an entity to show that you and your business are sort of separate, but you treat the business like your personal checkbook. I can almost hear IRS laughing in the background about your claim of separateness.
While a sole proprietorship and the owner are considered one entity by IRS, if you want to add validity to your business and make it look like a real profit-making venture, you need to stop paying your pet sitter from your business bank account.
So, what do you do?
In Godwin Start-Up School, we come up with scheduled, somewhat predictable draws for the sole proprietor to take. I like to treat those draws like I would a regular paycheck for a corporate shareholder/employee.
Here are two amazing things I’ve seen take place when we do this:
When money slowly drips out of a business, it acts like water on concrete…it finds the cracks. (Starbucks for everyone, tickets to a playoff game, new clothes for the proprietor!)
When there are larger, predictable draws that are designated for personal items such as mortgages and pet sitters, the frivolous spending actually drops off.
There’s more control; the business actually sees an uptick in available cash flow, and things just feel different.
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