“How much should I pay in salary
to us founders?” This is a common question I get when an aspiring startup founder
drops me a message on Facebook.
It’s understandable, to be honest. Many founders still have their day jobs while some just left theirs to start their companies.
It’s a bit of a challenge to shift from having a stable cash flow to exploring a totally uncharted path.
While I do believe the work that founders do for their businesses should be appropriately compensated for, taking salary
as compensation might not really be the wisest thing to do. Five out of six startup founders that I spoke with over the past year paid out salaries that were more than what was justifiable for founders.
In a while, I’ll be discussing the income tax consideration as applicable in the Philippines (which is applicable as well in most parts of the world), but for now, let’s talk about your salary
In a sole proprietorship, you establish the business as if it is your extension. In this case, you don’t pay your own salary.
Similarly, the income (usually measured in terms of cash) of the business is then treated as your own disposable income (in a way, salary).
The concept doesn’t really change when you go for incorporation, where you still own the business except that you share it with somebody else. But determining your fair share will be a challenge. Ultimately, the net income of the corporation (again, for most startups, this is ideally equal to cash, except for some adjustments to receivables and payables) should be split between the founders—yes, through dividends!
This is an excerpt from the article published on Tech In Asia. You can read the full article here.