Two simple ways to pay yourself as a business owner

As a business owner, you are probably wondering why you need to pay yourself. I mean "all the money in this business belongs to me, so why do I need to learn how to specially pay myself?"

You need to learn to remove your business from being part of you, to being a separate and more sustainable entity. 

See a business as living its own life. Cash flow is the lifeline of a business.

4 Reasons why you need to separate the business from yourself.

1. Separation of self: You have to separate yourself from the business. A registered business whether a business name or a limited liability company has got a life of its own.

2. Tax implications:  Taxes for businesses are calculated differently from individuals.

3. Reinvesting: As a business owner, you do not take all the earnings of your business as earnings to you. You have to leave a portion to reinvest.

4. Sustainability: Quite frankly, paying yourself as a business owner is a right way to grow a business that will live while you are alive and even when you are gone. 

This is the way people who have grown sustainable businesses have done it. Paying yourself forces you to look at the numbers and plan ahead. Of course, you can always increase your earnings, as the business earnings grow. You are the CEO, feel free to promote yourself from time to time as the business makes more money.

There are two very simple ways to pay yourself:

1. Monthly salary

Monthly salary, as the name suggests, refers to taking out a fixed amount every month as your salary, as the CEO of the business. As employees get paid, you also get paid.

2. Drawings

Drawings refer to taking out a bulk amount from the business at some irregular intervals. Imagine that as a business owner, once every year you take a drawing of Ksh.1 million to invest in a personal capital project, that’s a drawing.

Many business owners prefer to compensate themselves with drawings than salaries - because they are able to channel that bulk fund into huge family or capital projects.

Drawings may represent either profit generated by the business, or funds which the owner previously contributed, to operate the company. Drawings may also be a combination of profits and capital contributed. Whichever option you chose, drawings or monthly salaries, both methods constitute monies that the business owner has paid to himself and are taxable in the eyes of the taxman.

You may decide to use one of these methods, or a combination of both. Our advice is that a business owner deploys a combination of both methods - salary and drawings. They each have their advantages and work well if both are combined.

Salary allows the business owner to have some decent cash to run his daily life, while drawings allow the business owner to make huge personal investments. Everyone needs to have a balance of both kinds of earnings.

Robert Ochieng 
CEO-Abojani Investment- Abojani helps individuals with financial education and investment advisory