Personal Compensation

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Few entrepreneurs are in a position to operate a company without pay. In planning the financial aspect of a start-up, it important that adequate provisions are made for compensation of the founders, and to obtain enough capital to meet the salaries of the founders, in addition to those of employees. Many start-ups fail because of inadequate capitalization to cover executive pay.

While there is an understandable temptation to pay oneself with draws against earnings, the better plan is to pay a regular and reasonable salary.  By doing so, it is easier to keep control of personal finances and expenses and will lessen the stress involved in starting a company.  Factoring in compensation for founders also shows that there is careful thought given to actual capital needs. Importantly, this can also save the taxes that the company may have to pay, as salaries and employee costs are paid from pre-tax dollars. [Taking a regular salary also avoids any temptation to dip into capital to meet unexpected personal expenses.]

For many reasons, care must be taken in what can and will be expensed to the company: there must be some benefit or purpose for the company.

Lastly, while one can hope that shares in the company will at some point have value and could be converted to cash, this is unlikely at least during the first month of operation.

The bottom line is that the compensation needs of executive staff and founders must be included in pro forma capital planning.

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