Paying yourself as a sole company director
8 minute read
Establishing and running your own business is definitely something to be proud of. You make all the decisions, manage your schedule, and have all the flexibility you want. Simply put, you are your own boss.
As a business owner (or a sole director), you get to choose what will happen with the profits your business generates. Even though there are various taxes and duties that have to be fulfilled with the state administration, you still have the freedom to choose how you will pay yourself.
In other words, you decide how much you earn, how much effort you put in, and what rewards you enjoy. Clearly, the advantages of being a sole company director are numerous.
With this in mind, let’s take a look at the exact ways you can pay yourself if you are in this advantageous situation.
How do I pay myself as a director?
There are a few factors concerning the business type that will influence the way you pay yourself. However, these differences are not crucial as the concept of paying a salary is rather similar among most business types.
Let’s see how you could pay yourself a salary using a few common and simple methods.
Pay yourself a salary
It is possible to pay yourself from a limited liability company in the form of salary or the owner’s draw.
Salary is the recurring payment that is received each month. This is identical to the way common employees are paid. As a sole director, you would get a regular income, just like your employees.
This is the best method if a certain amount of income is important to you and meets your specific requirements. However, it is important to do some homework on the industry standards, the amount of work, and the location of your business in order to determine the salary amount.
It is also possible to receive the owner’s draw. This means that you would distribute the profits among each member based on the percentages stipulated in the operating agreement. However, since you are the only signing party, you can decide on the amount all by yourself.
Pay yourself as a member of an LLC
Again, this is the draw concept mentioned above. The gist is that the profits (or draw) earned during a fiscal year are distributed among the directors in case you want to pay yourself as a member of a multi-member Limited Liability Company (LLC).
According to this concept, each LLC member receives the percentage of their profits as stipulated in the operating agreement.
And if you are a sole director, you can decide on the percentage you receive.
Pay yourself as an independent contractor
If you have a specific skill that meets certain business needs, it is also possible to work and pay yourself as an independent contractor for your LLC. This makes it easy for you to stay within the budget.
As an independent contractor, you are a person that agrees to work for another entity. In this case, you are technically an employee but a separate entity that provides services independently.
Every tax authority sees individuals that provide this kind of work as a part of the gig economy. This means that contractors earn income by offering work on demand.
Contractors, in terms of taxes, are seen as sole proprietors or single-member LLCs. In translation, individuals are recognized as self-employed.
How can I be tax-efficient in paying my own salary?
Now that you know how you can render yourself a salary each month, let’s explore how you can be tax-efficient while doing so.
Take a straight salary
This is the most straightforward way to pay yourself. Receiving a straight salary is simple, easy to manage, and it is very unlikely that someone will see it as suspicious.
However, it is not the most tax-efficient option, especially once you start raising your salary.
Balance salary with dividend payments
As a business owner, you can also own stocks of your own company. This means that you could take a minimal salary and then pay the rest out of dividend payments.
This is a tax-efficient method since dividends are taxed less than salary. Just remember to ensure that the tax office in your area deems this to be legal.
Consider alternative payment in stock or stock options
Paying yourself through stocks is a very tax-efficient method, so make sure that you consider this option.
Take a combination of salary plus annual bonus
Opting for a combination of a salary with an additional amount gained through annual bonuses is also a good tax-efficient method. This kind of arrangement isn’t just reserved for the banking industry, but it will also pay off in tax efficiency in various circumstances.
Create a business agreement to pay yourself later
If you want to be tax-efficient but you are not looking for money right away, this option may be the best one for you. Write a business agreement to pay yourself later. This will, obviously, postpone the payment, but it will also become a liability for the company and it would need to be accounted for.
Bonus tips to take note of
First of all, keep in mind that you should pay yourself out of your profits. In other words, never pay yourself out of your revenue. Just because money is coming into your business does not mean that you should take it all. So, take everything into account, consider every cost, and then pay yourself a salary.
It is also important not to undervalue yourself. Do not ask for too much, but also value your skills and your time. Undervaluing your time and work will not only harm your productivity and your business, but it will also harm your reputation and self-esteem.
Remember to add yourself to the payroll but do not forget to pay yourself regularly. Avoid dipping into the funds as and when you need to.
Try setting up automatic payments both for yourself and your employees. This can be done easily with the help of good payroll software. Build this practice into your business plan from day one and allow yourself a raise every once in a while if your business starts growing.
This is great because you will develop a habit and you will get used to the amount of money you get which means that you will never have to worry about taking out occasional large lump sums.
Finally, make sure to consider the legal structure of your business. Consider how much you can pay yourself, when, and what legal restrictions you have to keep in mind. Remember, everything has to be within legal borders no matter the amount of money your business generates.
For instance, if you are a sole trader, you are free to pay yourself whatever and whenever you want to. This is partly due to the fact that you don’t have to think about shareholders or stockholders.
However, other business types (incorporated businesses) always have the business owner on the official payroll. This means that the owner receives wages regularly just like any other employee of the company.
However, this rule varies from region to region, so it is important to check with your accountant before you make a decision. Ensure that you record all transactions in your accounting software so that you have an audit record too. Make sure to do this just in case the tax authority decides to investigate your payments made to yourself.
Being a sole company director means that you have the ability to make all important decisions without having to listen to anyone else. However, this also means that you have quite a few responsibilities to keep in mind.
The best way to remain compliant and ensure smooth sails is to find reliable bookkeeping and accounting services. It is not necessary to hire in-house experts for this, you could find a remote solution that will work just as well, if not even better.
Sleek can help you track every expense as well as manage your accounting and financial records. This way, you will always be safe from any legal issues which will help focus on major business tasks tomorrow.
Interested in starting your business? Do not hesitate to contact us. Our team of experts will gladly answer all your questions and guide you every step of the way.