California, the premier hub for tech startups, is an exciting place for young entrepreneurs. When an entrepreneur starts a company there are important, practical questions to consider; for example, how do I pay myself when starting my company? There is no magic formula when deciding how to pay yourself when starting a company. Compensation depends on the stage of the business and its level of success. For instance, if the company is in the startup phase, your salary will be the amount the startup can afford to pay without significantly decreasing the company’s runaway. The California startup attorneys at Startup Company Counsel answer questions about how to compensate yourself when starting a new company.
How Much Should I Pay Myself?
There are many different schools of thought when it comes to compensation for startup founders, two of the most popular being:
- Pay yourself what you are worth
- Pay yourself only enough to get by
There are pros and cons to each of these policies and there are other options to consider as well. Ultimately, you will have to find a balance between sustaining the financial health of your business and sustaining your ability to live. Your business’ legal structure impacts your compensation. For example, if you are starting a corporation, you should avoid taking too great a percentage of total revenue as your salary. In addition, knowing the average income for the industry, field, and competitors gives a goal to strive towards. Contrastingly, if you are starting a limited liability company, your income will be a percentage of the startup’s profits.
Always be prepared to be flexible and accept that there will be down times or times of tight cash flow. Remember that your primary focus should be on the long-term growth of the business, not your paycheck.
How Should I Structure My Complete Compensation Package?
In addition to your base pay, there are other elements of a compensation package that you should consider. These can include:
- Performance incentives (equity, bonuses)
- Paid time off (sick time, maternity or paternity leave, vacation, etc.)
- Stock or other ownership interest
- Allowances or stipends
- Pension or retirement accounts
- Health insurance
- Life insurance
Again, you must find an appropriate balance between the financial interests of the business and your personal financial interests. With a multi-faceted compensation package, you have more opportunity to be creative in balancing both interests. Specifically, you could pay yourself a low base salary now, but in the future, create a generous performance incentive when the company’s profits have increased.
What are the Tax Implications of Compensating Myself?
Each form of compensation will be taxed differently. Stock can be subject to either capital gains or income tax, ownership interests can be subject to capital gains taxes, and salary is subject to both payroll tax from the business and income tax from the employee. Consult a corporate attorney to fully explore all possible options and find the compensation structure that best meets the needs of both you and your business.
Contact A California Startup Attorney Today
Let the California startup attorneys at Startup Company Counsel counsel your new business and help you consider all variables related to determining your salary. Decisions on compensation in the early stages of a company require careful consideration. Call our startup attorneys at (408) 441-7555, or use our online contact form to schedule your consultation with a California business attorney today.