Can your new business pay you a salary

Follow these steps to measure the impact of your salary on your new business — before you even launch it.

Do you want to launch your own business to do something you love while earning money? How much money should you pay yourself? Too little and you may personally struggle to make ends meet. Take too much and your business might struggle.

Finding the right balance is crucial to the success of both entrepreneur and enterprise. Once you know the salary you need, it's time to balance that figure against your business's finances.

While there are no fixed rules about owner compensation, you can follow these steps to measure the impact of your salary on your new business—before you even launch it.

1. Calculate your personal budget

Take the time to figure out exactly how much money you need from the business on an annual basis. If possible, use a past tax return or dig up expense receipts to identify your personal costs. Work with someone close to you to produce realistic figures.

Include these items in your budget:

  • Mortgage or rent payments.
  • Automobile and public transportation costs.
  • Utilities, insurance and service fees for television, telephone and internet.
  • Clothing and personal grooming.
  • Groceries and sundries.
  • Vacations, entertainment and dining out.
  • Childcare costs.
  • Credit card or other debts.
  • Dental and medical fees.
  • Personal savings.

Don’t forget about taxes—as a salaried employee of your business, you will pay income tax. Check with your accountant or consult the Canada Revenue Agency (CRA) website for current tax rates.

Be as accurate as you can—underestimating personal expenses is one of the biggest mistakes a new business owner can make. If you slip into the red, chances are your business will, too.

Let’s say you’ve calculated that your business must pay you a salary of $50,000 for the first year including taxes. You can now apply this number to your projected financial statements to see if business income will support it.

2. Check your projected income statement

Take the figure you need for a personal salary and plug it into your projected income statement for each of the first three years of your business. Review the spreadsheet to carefully assess:

  • Impact on profit - does the salary figure put your overall numbers in the red? While it’s natural for a new business to report minor losses during the start-up years as it struggles for profitability, major losses—like $50,000—may be too much for your small company to absorb.
  • Hiring - will paying your salary prevent you from hiring employees?
  • Other salaries - if your company has other founders or managers, is your salary in line with their compensation? Significant disparities may cause rifts.

The best advice is to review your projected income statement and salary expectations with an accountant. They’ll help you to decide what the business can reasonably afford to pay you, and provide recommendations to minimize any tax implications associated with your compensation.

3. Trial run your salary in projected cash flow

You'll need to check the cash flow projection in your business plan to ensure that you have enough money coming in to cover your own salary and other operating expenses. Plug your proposed salary into your monthly cash flow spreadsheet to see how the numbers change.

Ideally, your cash flow will have a surplus large enough to pay your desired salary every month, comfortably cover operating expenses (for items such as loan payments, office rent, employee wages, telephone service, office supplies and advertising) and leave a little margin for error.

When your business can’t afford to pay you

You may need to re-think your business plan if your income statement or cash flow crumbles under the weight of your proposed salary or draw. If that happens, your options include:

  • Revising your entire business strategy to earn more money.
  • Scrapping your plans for this business and starting a different one.
  • Reducing or removing your salary from the equation and finding the money to cover your personal expenses elsewhere. Perhaps your business can afford to pay you an incremental salary as it grows.

Next steps