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Can A Business Owner Pay Themselves Whatever They Want?

Can A Business Owner Pay Themselves Whatever They Want?

As a business owner, you have the flexibility to pay yourself from your business profits, but there are some considerations and limitations to keep in mind:

  • Business Structure – The business structure you have chosen (e.g., sole proprietorship, partnership, LLC, corporation) will impact how you can pay yourself. You can take draws or distributions from the business’s profits in some structures, such as sole proprietorships and partnerships. In others, like corporations, you may pay yourself a salary or receive dividends as a shareholder.
  • Reasonable Compensation – If your business is a corporation or LLC treated as a corporation for tax purposes, you should pay yourself a reasonable salary based on your role and responsibilities. The compensation should align with what other professionals in similar positions earn in the industry. Paying an unreasonably high or low salary can draw scrutiny from tax authorities.
  • Compliance with Tax Laws – When paying yourself from your business, ensure that you comply with all applicable tax laws and regulations. This includes withholding and remitting payroll taxes (if applicable) and reporting all income correctly on your tax return.
  • Available Profits – Your ability to pay yourself is subject to the financial health of your business. If your business is not generating sufficient profits, paying yourself large sums could negatively impact its operations and viability.
  • Dividends & Distributions – If your business is structured as a corporation, you may receive dividends or distributions from the company’s profits. However, dividend payments are typically made to shareholders and must be proportional to their ownership percentage.
  • Documentation – Maintain proper documentation of the payments you receive from your business. This includes pay stubs, bank records, and formal agreements outlining your compensation structure.
  • Personal & Business Finances Separation – Keeping your personal finances separate from your business finances is essential. Use a different bank account for business transactions, and avoid commingling personal and business funds.

While you have some flexibility in determining your compensation as a business owner, it’s crucial to strike a balance between fair compensation for your work and the financial well-being of your business.