I’m not a CPA and local/federal regulations vary, but there are several common reasons why entrepreneurs take a salary instead of keeping all of the profit.
First off, entrepreneurs are people, and people have personal expenses. Keeping a clear track record of regular income allows for covering non-business expenses without receiving embarrassing questions from the government.
It’s easier to take personal loans or apply for certain programs when you are on payroll. Even rental may be contingent on salary (every wantrepreneur can claim anything).
Financial planning is a lot easier when you take a regular cut on a monthly basis. You can allocate the rest to employee salaries, software licenses, rent, etc. Budgeting just makes a lot more sense.
Drawing company cash for expenses that are not directly related to the operations of your company is usually considered a form of fraud. The gray area is pretty broad, even things like buying toilet paper for your office or lunch for clients may not be directly accepted (or are taxed additionally) when paying with your business card.
Certain corporations may be subject to an audit that demands you to pay yourself a fair salary. This is a tricky one to pull off and under certain circumstances, this may end up with a lawsuit under “piercing the corporate veil”, i.e. you are personally responsible for claims against the company because the line between you as an individual and the firm is too thin and the court can appoint you as a responsible entity (with everything you own personally).
If you apply for funding, VCs will lock you out of a “draw everything for yourself” habit. This is crucial: unless you pay yourself a salary, you may end up unemployed should you take a larger round.
There are probably other legitimate reasons that lawyers and accountants can point out, and as we know, there are lots of CEOs of Fortune 1000 companies paying themselves $1 per annum. This shouldn’t fool you since this is doable with a solid bookkeeping team under certain corporate structures.
As an entrepreneur, paying yourself a salary instead of taking all the profits is a wise decision. It ensures personal financial stability, allows for business growth, and promotes financial discipline. This approach not only benefits you personally but also positions your business for long-term success.
