Paying Yourself as a Business Owner: Why It Matters and How to Do It Right
For many business owners, one of the most problematic aspects of running a business isn’t finding clients or supplying quality work—it’s determining how to pay themselves. Unlike a standard job with a predictable paycheck, owning a business blurs the line between personal income and company money. While it may feel natural to extract funds whenever they’re available, the way you pay yourself can have enduring effects on taxes, cash flow, and even your equity in the business.
The soundest approach depends on your business structure, and the rules are more explicit than most owners expect.
How Owners Get Paid by Structure
Sole Proprietors
Sole proprietors take “owner’s draws,” but taking money out at random can drain cash reserves and create tax headaches. Setting a plan for when and how much to draw keeps the business healthy and predictable.
Partnerships
Partners typically receive Guaranteed Payments, defined in the partnership agreement and paid on a regular schedule (weekly, biweekly, or monthly). Other withdrawals reduce a partner’s capital account, which can directly impact ownership share.
LLC Members
Payment rules depend on tax classification:
Single-member LLC (sole prop) → same as owner’s draws.
Multi-member LLC (partnership) → Guaranteed Payments apply.
LLC taxed as S-Corp → must take a reasonable salary with payroll taxes, just like any other employee.
S-Corps and C-Corps
Owners are required to pay themselves a salary with payroll taxes withheld. While this comes with added obedience, it also develops stability and unlocks the door to benefits.
Why It Matters
Taxes: The IRS requires “reasonable compensation” for certain entities. Paying yourself incorrectly can trigger penalties or audits.
Cash Flow: Pulling money at the wrong time can leave the business strapped—or your personal finances short.
Equity: In partnerships, taking funds outside of your agreement can reduce your ownership percentage.
Future Planning: Using the correct pay method supports retirement contributions, insurance, and long-term financial security.
The Bottom Line
Compensating yourself is more than just moving money into your bank account; it’s about creating an enduring approach that protects both you and your business. By executing the correct structure and having a concrete plan, you can assure fair compensation, stay compliant with regulations, and lay the foundation for long-term success.
You’ve poured everything into creating your business—make sure the way you pay yourself mirrors the value of your expertise.
