Remember that, in early stages, you need to reinvest and retain business capital to grow your business as it is by and large the only source of finance. It is also important not to draw too much from the business if you wish to attract potential investors. A very useful approach is to prepare budgets for both your business and your personal income and expenses and update them regularly. This will help you manage your drawings more effectively.
If your budgets suggest your business has surplus funds that you can draw as income then speak to your professional advisor for the most tax efficient way of drawing money out. They will also be able to advise you whether you should quit your job or work part time.
There are two questions you need to ask yourself in terms of how much to pay yourself:
1) How much do you need or want to live on? This is not only to pay your bills but to spend on other expenditure items?
2) How much can the business afford to pay you? In deciding this, ensure you do not leave the business short of cash for paying suppliers or other future planned/ desirable business expenditures
In terms of ‘how’, you can simply transfer money from your business bank account to your personal bank account. Specifically, there are two basic ways of paying yourself if you are a limited company – you’re probably best off combining the two, which results in better tax savings:
1) Salary – paid as a normal, usually monthly, payment from the company
2) Dividends – paid from profits left in the company. Note, if the company is not making profits, you cannot pay any dividends
If instead you set up as a sole trader, you can pay yourself as and when is needed (called ‘drawings’). In terms of quitting your day job, or working part-time: this depends very much on you, and your business. Questions I would ask are:
1) How confident do you feel that the business will be a success?
2) Can you afford to work part-time (or even leave your job) and finance yourself while the business builds up to make a living for you?
3) How committed are you to the business succeeding and you putting in the work to make it do so?
At the outset, it is usually recommended that you research the business proposition to ensure it is viable along with an initial pilot phase – such as generating some initial sales – before you leave or go part-time. However, that may not always be the right advice – particularly if you really feel the business has great potential, and are committed to building something successful and putting in the hard work. If you think the latter applies to you, do think it through very carefully though, as leaving a full-time job could have some considerable effects on your personal cash flow (particularly in the short term).
If you have gone down the company route it is generally accepted that you should pay yourself a minimum salary and then potentially any other income as dividends. Always be mindful of tax bandings and tax years.
Whether you should quit your job depends on whether you can work on the new business part time. Also whether you have a partner who can support you while you get the business going and whether you have sufficient savings to use whilst the business gets going etc.
The general rule for a start-up should be that the owner should pay themselves the minimum necessary to sustain them until the business is revenue generating and can afford to pay more.
It will probably be the case that in the early stages you’re earning less than some of your employees, but your eventual reward will be in the capital value of the business and you should be prepared to forgo short-term reward to maximise that long-term value and also minimise the level of start-up funding required.
If the business is a limited company, is profitable and you own 100% of the shares, it will be most effective to take ‘salary’ by way of a dividend which saves the company the 13.8% cost of employer’s National Insurance. If these conditions do not apply you should draw a conventional salary via the payroll.
As for working part-time or not, it depends on the time commitment required, but if you can then it makes sense to try and start the new business alongside your existing job. This will de-risk the situation as the new business can get off the ground without having to provide a salary for you, and the concept can prove itself before you give up the security of paid employment for good.
As a business owner, you will probably want to take your pay as salary or dividend, or a combination of the two.
How much and how frequently though, will depend on the performance of the business. As a founder, you may need to provide financial support to the business as it grows, rather than take money from the business.
If you can start your business whilst working full time or part time you will help yourself a lot. Your free resource is your time. If someone will pay you and you can get your business going after work and at weekends then do that as it will aid your cash flow. Don’t expect any early nights when starting out. If it was that easy to run a successful business, everyone would do it.
They don’t and many businesses go to the wall. Your effort and tenacity will see your success. Pay yourself with the surplus funds the business generates. Remember you will need to reinvest profits, especially at the beginning, so be prepared to work for free for a while.
Hear Paul’s expert advice on Paul Stankiewicz of ICAEW BAS member firm, Paul Marks and Co Chartered Accountants.
Paul has provide answers as a series of video responses for entrepreneurs and would-be entrepreneurs. Listen to his response here: Watch Paul’s advice in full
In the beginning, pay yourself as little as you can survive on. You need to invest in your business.
By experience I have found the ideal solution is to continue your existing or similar job part time.
This gives less financial worry and keeps a fall back position in case the business fails.
At the beginning, it’s normally better to leave as much profit in the business as possible and re-invest to fuel growth. Once your business is established you can pay yourself/ selves more.
If the business is your only source of income and it’s a limited company, then the most tax efficient method is to pay a small salary of £8-10k each to the directors and to take the rest as dividends. This approach would avoid national insurance and if the total paid is below approximately £40k, then there won’t be any income tax payable either.
If you don’t have any savings, and the business isn’t going to generate cash from day one, then it’s a good idea to continue working part time to support yourself. However, you may need to inform your employer depending on your employment contract or staff handbook.
There is a school of thought that says if the business can’t afford to pay you a living wage from day 1, you shouldn’t be doing it. On the other hand, unless you have substantial capital to inject in the business at the beginning, it is probably going to need to keep what money it generates in the early days to fund further expansion.
So it comes back to pre-launch planning to ensure that cashflow will be sufficient to ensure the survival of both yourself and the business. Certainly, if you are able to hold onto a day job until your new business is generating enough to support you, that’s the safest way to do it!