Determining Owner Pay in Your SMB

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1. Feature: Determining Owner Pay in Your SMB (4 min)

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Owner pay is one of the most sensitive decisions in a small business and, done poorly, one of the most dangerous.

Pay yourself too much and you gradually weaken the company. Pay yourself too little and you strain your household, then make desperate business decisions to catch up.

The job is not to guess at a number that feels right. The job is to put a simple structure around what you take out, what you leave in, and how you protect both sides of your life from a bad year.

What This Article Covers

This article focuses on three linked questions:
How to separate business and personal money. How to decide what the business can safely pay you. And how to know when to take less to protect its future.

The goal is not perfection. The goal is a framework that lets you sleep at night personally without putting the company in intensive care every time the economy wobbles.

Draw a Bright Line Between You and the Business

Healthy owner pay starts with a simple rule: your business is not your personal checking account.

Banks, accountants, and the SBA have made the same point for years. Keeping business and personal finances separate protects personal assets, reduces tax headaches, and builds credibility with lenders.

The mechanics are basic but powerful. Open a dedicated business checking account, run all revenue and expenses through it, and set up a regular transfer to your household account. Once that line is drawn, you can see clearly what the business earns and what you take out. That clarity is the foundation for thoughtful decisions about pay.

Understand Your Options by Entity Type

How you pay yourself depends less on preference than on how your business is taxed. The principles are consistent, but the mechanics differ.

S Corporations
If you own an S corporation and work in the business, the IRS expects you to pay yourself a reasonable salary before taking distributions.
That salary runs through payroll and is subject to employment taxes. It should reflect what someone else would be paid for similar work.

After a reasonable salary, additional profits can be paid as distributions, which generally avoid self-employment tax. That difference is one reason many owners choose S corporations and one reason the IRS pays close attention to compensation levels.

To stay on a safe path, set a conservative salary you can sustain in average years and treat distributions as variable. When cash tightens, distributions pause first.

LLCs Taxed as Pass-Throughs
Most small business LLCs are taxed as pass-through entities. Owners typically take draws rather than wages.
That flexibility is useful and dangerous. Without structure, it’s easy to pull money whenever it’s available and confuse profit with cash.

The fix is discipline. Set a regular draw schedule based on what the business can support after expenses and reserves. If you want more consistency, treat your draw like a salary in practice even if it isn’t one legally.

Sole Proprietors
In a sole proprietorship, there’s no legal separation between you and the business, but there must be a financial one.
You do not pay yourself wages; you take draws from profit. The risk is treating the business account like a personal wallet and losing sight of what the business truly earns.

The discipline is the same as in larger entities: one business account, one personal account, and planned transfers between them.

Start With What the Business Can Safely Afford

Owner pay that ignores business economics eventually breaks something.

A better approach starts with a clear look at what the business can support. Review revenue trends, margins, and cash flow over the last 12–24 months, not just the most recent strong quarter.

Know your monthly obligations: rent, payroll, utilities, insurance, debt payments, and inventory costs. Work toward building three to six months of operating expenses as a reserve; inventory-heavy or cyclical businesses may need more. That cushion turns volatility into inconvenience instead of crisis.

Only after those commitments and reserves are covered do you decide what’s left for owner pay. Some advisors suggest treating a portion of operating income or a percentage of revenue as an upper bound. These are not rules but guardrails.

Then Check What Your Household Actually Needs

Once you know what the business can afford, face the other side of the ledger — what your household needs to live without financial strain.

Advisors see the same trap repeatedly: the business supports a certain level of pay, but the owner’s lifestyle expects more. The gap gets filled by extra withdrawals, and reserves never recover.

A healthier pattern starts with a bare-bones personal budget, such as housing, food, insurance, debt, and non-negotiables. Growth comes later, after the business proves it can support it.

If the business cannot reliably cover that minimum without dipping into reserves, that’s a signal to adjust personal spending rather than weaken the company.

When to Take Less From the Business

There are seasons when the right decision is to deliberately take less to protect what you’ve built.

Common signals include being below your reserve target, seeing revenue decline for several months, or realizing that one bad quarter could endanger payroll or debt payments.

Banks and treasury professionals converge on the same advice: build and protect a cushion first. It’s the shock absorber that keeps a bad year from wiping out both the business and the household.

In practice, this can mean temporarily lowering your pay, pausing discretionary draws or distributions, and letting the balance sheet recover before stepping back up.

The Long Game

Healthy owner compensation follows the arc of the business.

As revenue stabilizes, margins improve, and reserves grow, pay can increase gradually and predictably rather than in sudden jumps. Some owners use simple multi-year pay ladders tied to revenue or profit milestones to avoid constant renegotiations with themselves.

The point is not to underpay yourself forever but to respect both sides of the balance sheet. The business needs enough capital to survive shocks. The household needs enough steady income to avoid panic and poor decisions.

When you separate the money, run the numbers honestly, and accept that there are seasons to take more and seasons to take less, you give both a much better chance of making it through the next decade together.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!