6 Considerations to Help You Determine Your Salary

There’s so much to prepare for and track on the financial side of your business. Yet one thing that’s easy to overlook is your salary.

Regardless of whether you’re selling goods or services, it’s not as simple as making a sale, then pocketing cash.

Instead, like other facets of your business, it’s best to approach your salary with some planning and thought. We’ll get you started with 6 considerations to help determine how much you should pay yourself.

Follow your business structure

Depending on how you’ve set up your business — whether as an LLC or a corporation — will dictate the IRS owner compensation guidelines you should follow.

For example, if you’re working as a sole proprietor, you don’t have many financial guidelines to follow — but that also means you’re on the hook for any liability that may occur.

On the other end of the spectrum, if you’ve established your business as a corporation, you’ll need to operate a payroll and pay yourself (and any other employees) a salary. Profits are attributed to the business, not the entrepreneur. And, each year, you’ll need to file a corporate income tax return.

If you run an LLC, you’re more in the middle. You’ll already have a business bank account, so, once you determine your salary, you can simply pay yourself and deposit that money into your bank account. We’ll talk more in a moment about the importance of keeping your finances separate.

Establish a baseline

Once you understand any salary or other financial requirements you’ll need to follow based on the type of business you run, the other key factor to determining your entrepreneurial salary is knowing how much you need to make.

If you haven’t already, make a list of your living expenses, including housing, utilities, other bills, food, insurance and transportation. That gives you a baseline of what you need to make to ensure your expenses are covered.

It’s not uncommon for entrepreneurs to forego paying themselves in the early days of their businesses. That’s a decision that each entrepreneur should make depending on key factors like cost of living, business revenue and, if applicable, start-up financing. If you know that starting a business is something you want to do, it’s a good idea to go ahead and start setting aside some money (if you haven’t already) that can help provide a cushion as your business gets up and running.

Set your pay guidelines

At some point, it’s likely you’ll have at least a few employees. Prepare for that milestone by establishing your business’s pay guidelines (and start by using them on yourself!)

Start by doing some market research on comparable salaries in your industry. Then, once you’ve established base salaries for your company’s positions, decide other factors like when and how you’ll give raises. It’s important to be thoughtful and fair when determining and adjusting compensation, which is why it helps to put at least a basic plan in place before you need it.

Plus, having pay guidelines in place can help protect your business, too. If you experience sudden success and your revenue increases accordingly, it’s easy to overpay yourself. There’s no doubt you deserve the money, but like anything else in business, it’s worthwhile to be deliberate and methodical about your decision-making, including your salary. That way, you don’t inadvertently shortchange your business or run into other potential problems.

Keep your personal and business finances separate

We can’t emphasize how important it is to open a business bank account and use that for any business-related expenses. Not only is it easier to compile the data you’ll need come tax time; you can also more easily monitor your company’s performance and more proactively approach challenges like a decline in revenue.

Talk to an accountant

Don’t hesitate to run your salary plan by an accountant, especially as you’re getting started. Accountants are invaluable in helping you make sure you’re following all applicable tax-related guidelines and that you have the processes and systems in place to avoid costly mistakes.

Freelancers, this means you!

Not everyone considers freelancers entrepreneurs, but we certainly do. And we understand how easy it is to collect payment for your work, then simply deposit it and not give it much thought. Some freelancers take the extra step of withholding applicable taxes from each payment, since w9 income isn’t taxed. Yet there’s no reason you shouldn’t follow the same steps listed above to determine your salary. Open a business bank account for yourself and make all of your deposits there, then pay yourself a biweekly or monthly salary. Track all of your business expenses so that you can qualify for applicable tax deductions. You might also want to talk to your accountant about shifting to quarterly estimated taxes, which you’ll pay based on the previous year’s earnings. You’re much less likely to get a nasty surprise come tax time if you’ve been proactively paying your taxes. Plus, understanding all of your business expenses like taxes will ensure you can pay those while also paying yourself.

If you find yourself overwhelmed and not sure how to approach your own salary, help is a click away. Register for our free Kauffman FastTrac course, which gives you all of the information you need to start your business. That includes setting realistic financial goals (like your salary) and determining your steps to profitability. Plus, the course is self-paced, so you can start any time.

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9 “Boiler Plate” Contract Terms You Should Know

Entrepreneurs sign a lot of contracts. From starting your business to hiring workers and signing up clients, contracts are everywhere. And while you may be an expert on your business plan, you’re probably not an expert on contract terms–especially the “boiler plate” terms found near the end of most contracts.

While it may be tempting to skip over those boring terms, you really need to read them since they can have contract-wide implications.

Below is an intro to nine of the most common terms.

1. Entire Agreement

When signing a business contract, you usually want that contract (and that contract alone) to govern your deal. Accordingly, this provision will say that “this agreement” controls the deal and that all prior negotiations, documents, etc., are not valid. If you have addendums or other documents that should be binding on the parties, it is usually a good idea to reference them here (or somewhere in the agreement).

2. Amendment

This provision usually says that a party may not amend the contract without the other party’s prior written consent. Further, if consent is provided, the amendment must usually be in writing.

3. Waiver

A “waiver” occurs when one party breaches the agreement and the other party doesn’t enforce their rights. For example, your client may pay you 35 days late, but you don’t charge them interest (i.e., you are waiving your right to enforce the contract). This provision will say that the waiver is only binding if it is in writing and that one waiver doesn’t mean you will waive future breaches.

4. Severability

A severability provision usually says that if a court rules a certain provision too broad to be enforceable (or unenforceable in its entirety), that the court should reduce the provision to make it enforceable (or in the case of removing an entire provision, the court should still enforce the remainder of the agreement). This is helpful to ensure the entire agreement is not invalidated due to one small issue.

5. Assignment

This provision usually says that a party may not assign their rights under the contract (or the contract itself) to a third party without the other party’s written consent. Further, the assignment must usually be in writing. The assignment provision can be mutual or unilateral. If it is unilateral (i.e., only one party can freely assign), then you should consider whether that makes sense for your deal.

6. Notices

Most contracts contemplate various “notices” that must be provided from one party to the other (for example, a termination notice). A notice provision will set out how the notice should be sent (i.e., overnight, via email, etc.), to which address it must be sent, and when it will be deemed delivered. Often, if a party’s address changes, it will be required to update the other parties to the contract.

7. Governing Law

There are two parts to governing law provisions. First, which state’s laws apply. You may not know this, but a court in Florida can use Alaska law to resolve a dispute (this applies to all states). Thus, stating which state’s law will apply will help the parties to understand their rights up front. The second part is what court the parties must use. This is usually called “jurisdiction” or “venue.” This section requires the parties to use a specific court to resolve their disputes. In this regard, you should be careful not to agree to use a court far away from your place of business.

8. Attorneys’ Fees

In America, the general rule is that the losing party in court does not have to pay the winning party’s attorney’s fees. However, you can include a provision in your contract that requires the losing party to do so. If you are more likely to sue the other side, then you may want to include this. If the other side is more likely to sue you, then you may not want to include this.

9. Counterparts & Signatures

This provision usually says that if the parties sign different copies of the agreement, they should be treated as though they were just one copy. However, in our modern business world, more and more contracts are being signed using electronic signature platforms like DocuSign and HelloSign. Thus, the counterpart language isn’t as important. However, it is often a good idea to say that the parties may use digital signatures and that digital and photocopies of the agreement should be treated like original paper versions.

Looking for more?

The best way to start a new business and actually succeed is to get help from other professionals. To do that, you can enroll in the Kauffman Foundation’s FastTrac program at www.fasttrac.org for free courses and materials to help you write your business plan and start your business.