Starting your own business, is a big step. Whether your motivation is take control of your financial life or to have more free time with family and friends, you would need to think about receiving rewards which goes with owning business.
Generally, there are two ways a business owner can be paid. Receive a salary or tale a draw against the equity account of the business.
Salary Definition
If your enterprise is a corporation, whether it’s a “C”, “S”, or an “LLC” and you are an officer of your enterprise, but have no agreement in place for a compensation, then, you wouldn’t receive a salary. However, you take a position of an employee with your company, then you should be taking a salary.
Draw Definition
Business owner who has formed a sole proprietorship could take a draw up to the invesntment amount of the owners equity. To determine that, your business should have a financial statement consist of at least five sections. There are as follows;
- Business income
- Expenses incurred to produce the income
- Assets
- Liabilities
- Equity
Business owner’s equity section of the balance sheet should be consist of three sections. They are as follows;
- Initial investments made
- Draws against the equity
- Non-Profit
- All other assets whether tangible or in-tangible