As a business owner, you have a few different options when it comes to how you get paid for your work. One option is to take a salary, which is a regular payment that you receive for your job. Another option is to take an equity withdraw, which is a payment that you receive based on your ownership stake in the business.
A salary is usually paid on a regular basis, such as weekly, biweekly, or monthly, and is based on the number of hours worked or the job performed within the company. It is a fixed amount that does not vary based on the company's profits or financial performance.
An equity draw, on the other hand, is a payment that is based on the owner's ownership stake in the company. If the company is profitable, the owner is entitled to a share of those profits based on their ownership stake. For example, if an owner has a 20% ownership stake in the company and the company generates $100,000 in profits, the owner would be entitled to an equity draw of $20,000.
The main difference between a salary and an equity draw is that a salary is a fixed payment, while an equity draw is variable and depends on the financial performance of the company. As a business owner, you have the option to choose between taking a salary or an equity draw, or a combination of both. The right choice will depend on your personal circumstances and the needs of your business.
Salary
Let's start by looking at taking a salary. This is a common approach for many business owners, especially those who are just starting out. When you take a salary, you are paid a fixed amount on a regular basis, such as weekly, biweekly, or monthly. This payment is usually based on the number of hours you work or the job you do within the company. For example, if you are a business owner who works as the CEO of your company, you might receive a higher salary than someone who works as a salesperson.
There are a few benefits to taking a salary as a business owner. One is that it can provide a predictable source of income, which can be helpful if you have financial responsibilities or commitments. It can also be easier to budget and plan your finances when you know exactly how much money you will be receiving each pay period. Additionally, taking a salary can make it easier to claim certain tax deductions and credits, such as the earned income tax credit.
On the other hand, there are also some drawbacks to taking a salary as a business owner. One is that it can limit your potential income. For example, if you have a successful year and your business generates a lot of profits, you will only receive your salary, rather than a share of the profits. This can be frustrating if you feel like you are not being fairly compensated for your hard work and contribution to the company's success.
Equity Draw
Now let's look at an equity withdraw. This is a payment that you receive based on your ownership stake in the business. If you own a percentage of the company, you have the option to take an equity withdraw, which is a payment that is based on that percentage. For example, if you own 20% of the company and the company makes $100,000 in profits, you would be entitled to an equity withdraw of $20,000.
There are a few benefits to taking an equity withdraw as a business owner. One is that it can provide a potential for higher income. If your business is successful and generates a lot of profits, you can receive a larger payment through an equity withdraw than you would through a salary. This can be especially appealing if you have put a lot of time, effort, and resources into growing the company.
Another benefit of an equity withdraw is that it can be a way to reward yourself for the risk you have taken as a business owner. Starting and running a business is not without risk, and an equity withdraw can be a way to recognize and reward yourself for taking that risk.
However, there are also some drawbacks to taking an equity withdraw. One is that it can be more unpredictable than a salary. If your business is not doing well, you may not receive as much of an equity withdraw, or you may not receive one at all. This can make it harder to budget and plan your finances, as you may not know exactly how much money you will be receiving.
Another drawback is that taking an equity withdraw can have tax implications. Depending on the structure of your business, an equity withdraw may be considered taxable income, which means you will need to pay taxes on it. This can reduce the amount of money you receive, and it can also be more complex to manage your taxes when you are receiving an equity withdraw rather than a salary.
Conclusion
Ultimately, the decision between a salary and an equity withdraw will depend on your personal circumstances and the needs of your business. It's important to carefully consider the pros and cons of each option and decide which one makes the most sense for you. You may also want to consult with a financial advisor or accountant to help you make an informed decision.
In summary, a salary is a regular payment that you receive for your job as a business owner, while an equity withdraw is a payment that is based on your ownership stake in the business. Both options have their own benefits and drawbacks, and the right choice for you will depend on your personal circumstances and the needs of your business. Regardless of which option you choose, it's important to keep track of your income and expenses, and to plan your finances carefully to ensure that you are able to meet your financial obligations and achieve your long-term goals.