Besides managing the business and taking care of employees, business owners also need to allocate time for personal matters. Therefore, when your business is stable and doing well, it's time to allocate your own income. However, there are several aspects to consider. Many people wonder how to appropriately allocate compensation for business owners. We would like to invite you to explore the criteria used to calculate compensation that won't affect your business model.
Stability of the business is essential before payment.
Before business owners start paying themselves, it's crucial to first ensure the stability of the business. Make sure your business has a consistent and regular income stream, with projects that generate revenue for the company consistently and continuously over time. Importantly, ensure that your business is properly registered according to the law. Once all these elements are in place, you can begin paying compensation to yourself as a business owner.
Clearly separate personal funds from company capital.
Even though you are the owner of the company, it doesn't mean you can withdraw money from the company's funds as you please. The first thing to do is to clearly separate personal accounts from business accounts. Failure to manage this aspect can lead to future complications. Firstly, it can make it difficult to determine the actual profit or income of the business, resulting in challenges in accounting. This, in turn, can affect the calculation of personal and corporate income taxes. To prevent such situations, it is important to clearly separate personal accounts and company capital. If you need personal funds, they should come from a designated salary that you allocate.
Compensation should be reasonable and fair.
Undoubtedly, fairness is vital in conducting business. The criteria for allocating compensation for business owners should also be fair. The question then arises, "How much is considered fair?" Estimate your personal expenses to establish a baseline for your salary. Proper planning in this regard can also help save on corporate income tax. Alternatively, if you choose to withdraw funds from the capital used for company operations, you must return the money to the company's funds by the end of the fiscal year. Another good option is to receive dividends from the accumulated profits of the business. However, this method is less common since these funds cannot be deducted as business expenses for tax purposes and are subject to a 10% withholding tax. Therefore, if the business is experiencing losses, it may not be possible to distribute dividends to the business owner.
Additional insights on calculating compensation for business owners:
If your business generates stable profits and returns, you can pay yourself a salary based on the average monthly profit rate the company receives. It is well known that dividend payments can only be made when the business is profitable. Thus, careful consideration is needed before deciding on this type of compensation. If you choose to receive a regular salary, ensure that paying dividends will not create problems or burdens for your business. Reviewing and evaluating the owner's salary to align with the overall expenses of the company is also recommended. It can contribute to the sustainable management of your business.
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