Karl Hughes

The Entrepreneur's Salary Guide

The Entrepreneur's Salary Guide

When I started my business last year, I knew I wanted to pay myself something from the beginning. At first, I couldn’t take much money out of the business, but as my company grew, I steadily increased my salary. While I’m still making less than I did as a CTO at a startup, it’s slowly catching up.

But like many entrepreneurs, I didn’t go into business purely to make money. Running my own company gives me a lot of freedom, challenging work, and a valuable asset that I may be able to sell someday.

How Much Money Entrepreneurs Make

As an entrepreneur, you take on a lot more risk than your employees, but you might not be getting paid more than many of them.

According to Zippia, entrepreneurs in the United States take home an average salary of $74,000 per year.

Entrepreneurs make $74,000 per year according to Zippia

This sounded surprisingly high to me, and ZipRecruiter seems to agree. They peg the average entrepreneur’s salary at $43,430 per year in the U.S.

Entrepreneurs make $43,430 per year according to ZipRecruiter

So, the average salary for an entrepreneur in the United States is likely somewhere between $40,000 and $75,000 per year. But, this number might be a bit misleading.

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Entrepreneurs Can Make a Lot of Money

Unlike most professions, entrepreneurs have theoretically no limit to the amount they can get paid.

“Theoretically, your earnings potential when you work for yourself is unlimited. This is largely because you’ll likely stop trading time (which is limited) for money in the same way you do to earn a paycheck as an employee. The more value you provide via goods or services, the more others will pay for what you’ve offered.” - The Four Hour Workday

As an entrepreneur, you can pay yourself as much of your company’s profits as you want (assuming you don’t have other shareholders who disagree with you).

The Millionaire Fastlane book cover

Additionally, entrepreneurs can get a large financial payout when they sell their business. In The Millionaire Fastlane, M.J. DeMarco points out that “Almost all penta-millionaires made their fortunes in a big lump sum after a period of years,” and most of those were business owners.

So if you’re running a wildly successful business, you might be able to pay yourself a substantial salary and get a big payday when the business sells. Sounds pretty sweet, right?

But Entrepreneurs Have No “Minimum Wage”

On the other hand, as a business owner, nobody can guarantee that you will get paid at all. There’s no minimum wage when you own your own business, so if your company doesn’t make money, you don’t make money. Most entrepreneurs face getting paid nothing at some point in their careers:

“26 percent [of entrepreneurs] had gone two to six months without paying themselves and another 25 percent went more than six months without a salary.” - Inc. Magazine

In fact, many entrepreneurs lose money when they start a business:

“About 30 percent [of small businesses] break even and another 30 percent lose money. Moreover, small business owners have personal bills, too…So if the business breaks even over its lifetime, that probably doesn’t cut it.” - Entrepreneur Magazine

So while the “unlimited upside” of entrepreneurship makes it appealing to many, it’s never a sure thing. Entrepreneurs have to take risks if they want the possibility of success. In this way, an entrepreneur’s salary is much different from a typical employee’s salary.

Interested in learning more about entrepreneurship? Here are my favorite books for founders to help you get started on your journey.

How Entrepreneurs Set Their Salaries

I’ve met hundreds of entrepreneurs over the past decade working in startups and small businesses, and I’ve had the opportunity to learn how many of them set their salaries. I’ve found that entrepreneur salaries tend to fall into one of these five categories.

1. Overworked and Underpaid

Almost every entrepreneur starts by working very hard and making very little money. Stories of founders hacking all night on their software startup or new restauranteurs spending 16 hours on their feet every day are common in entrepreneurial lore.

These kinds of long hours aren’t sustainable, and they may not even be necessary. Startup culture tends to glorify long hours because it makes a better story than a founder diligently working 40 hours every week and going home to spend quality time with their family every night.

Still, whether by choice or necessity, many entrepreneurs are certainly working too much for too little salary. You can do this for a while, but if you’re three years into your business and it’s still not making enough profit for you to pay yourself a living wage, you might want to go back to the drawing board.

If you're three years into your business and it's still not making enough profit for you to pay yourself a living wage, you might want to go back to the drawing board.

2. Overworked and Overpaid

I was recently on the Freelance to Founder Podcast, and co-host Clay Mosley brought up the fact that some founders get stuck by paying themselves too much. His point was that if you’re trying to grow a business, you need to re-invest some of your money into hiring other people who can take some of the work off your plate.

Founders who are paying themselves a hefty salary but doing all the work themselves are essentially freelancers. There’s nothing wrong with being a freelancer, but it’s not quite the same as building a business that can operate without you.

3. The Re-investor

I am currently in re-investment mode with Draft.dev. The company is making pretty good money, I have a small team helping me out, and I’m taking a small salary, but most of the excess goes back into the business.

I spend our profits as quickly as I can on new hires, marketing channels, and long-term investments in the business. This is not a terrible mentality for a new business, but at some point, I know I’ll need to pull back.

The risk in re-investing all your company’s profits back into the business is that you might never get a chance to take any liquidity out of the business. What if the economic environment changes? What if new competitors siphon off your customers? What if you get sick and need to sell the business quickly?

Entrepreneurs who have all their capital tied to a single small business risk going to zero. It might be necessary to re-invest a lot of your profit early on, but eventually, you’ll probably want to start taking more out to invest in other, less risky assets or a new business.

4. The Executive

Becoming an executive in your company means that you’re removed from most of the day-to-day execution of work and instead focused on high-level strategy and direction. Entrepreneurs who get to this point also pay themselves accordingly - making $100,000 - $500,000 per year.

For entrepreneurs who enjoy running their business, this is an ideal position to be in. You’re making enough money to live very comfortably, doing a job you love, and you’re able to diversify your risk by putting your extra cash into other investments.

The only downside to becoming an executive is that you’ll have executive-level headaches. A lot of new entrepreneurs think that if they can just reach the next milestone ($2 million, $10 million, or $50 million in revenue), they’ll be able to sit back and not worry about their company.

Wrong.

The challenges (and stresses) don’t go away as your company gets bigger, and for some entrepreneurs, they seem to multiply.

5. “Passive” Income

Finally, I’ve known a very few entrepreneurs who own businesses that pay them a salary without requiring any of their time.

Very few of these entrepreneurs are first-time founders. Most have spent decades building a network, cultivating mentors, learning an industry, and amassing wealth. By the time they hit their third or fourth business, they have enough capital to pay others to manage their businesses for them.

There is also a tiny cadre of entrepreneurs who generate a livable passive income from a single small business that they own. While these businesses never start as passive, it is possible to design a company that runs without you and pays you a great salary. It’s just extremely rare.

How to Pay Yourself as an Entrepreneur

When I first started working for my own company, I quickly realized I wasn’t even sure how I was supposed to pay myself…logistically or legally. I had set up a business bank account, but I felt stupid asking my bookkeeper, “So, do I just transfer money from my business to my personal bank?”

https://i.imgur.com/AU8E79m.jpg

It turns out that the answer to how you should pay yourself depends on your business.

Disclaimer: I am not a lawyer or accountant. Also, all of this information is based on my personal experience doing business in the United States in 2021. Laws change, and every state and country has different rules, so please consult with a professional before you start moving money around!

1. Owner’s Draw

If your business is a sole proprietorship, single-member LLC, or other pass-through entity, all the income from your business is ultimately counted towards your personal income for tax purposes. So, you can make a direct payment by transferring money from your business to your personal account each month.

Once we were consistently profitable at Draft.dev, I set up an automated payment to myself each month. Assuming you’re keeping track of this in your accounting processes, you’ll include these transfers as part of your business’ profits for tax purposes, so unlike your employee payroll, this money is not deductible.

Not every entrepreneur can use direct payments though as some business types have more stringent rules about paying salaries.

2. Paycheck

Most entrepreneurs with a C-Corporation or S-Corporation set up a payroll system and collect a paycheck much like their employees do. There are rules about setting a “reasonable salary” and your business will have to pay payroll taxes when you use this method of paying yourself.

The upside to putting yourself on payroll is that you could pay less in taxes overall. The profits kept in the business may be taxed at a lower rate than your personal income, plus your company can deduct your paycheck like any other employee’s. This advice is not universal, though, as setting up a C-Corp is more complicated and can be more expensive to maintain.

If you’re looking for a payroll provider, I wrote a detailed review of some of the best options, so be sure to check it out.

3. Dividends

Another way that businesses can pay owners is by paying dividends. Dividends are essentially the payment of excess profits to business owners. While convenient, they are not necessarily tax-friendly, but they might be necessary if you need to get cash out of your business quickly.

4. Business or Equity Sale

Finally, entrepreneurs can make money by selling part or all of their company. This might mean issuing shares to investors, selling a stake to private equity investors, or selling the whole business as an asset or stock sale.

None of these methods is mutually exclusive. For example, many business owners pay themselves a salary and take out dividends if they have more money left over at the end of the year.

Increasing Your Salary as an Entrepreneur

If you are a business owner and you’re reading this because you want to make more money, I’m afraid I don’t have any “quick tricks” for you. That said, you’re in control of your business, so making more money just means you have to design your company to give you that option.

https://i.imgur.com/aUAzXMI.jpg

Easier said than done, I know, but here are a few ways I’ve seen entrepreneurs do it:

Raise Prices

“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” - Warren Buffett

When I first started Draft.dev, I had packages as small as two blog posts per month. I wanted to give customers the ability to start small, but what this ended up doing was attracting price-sensitive tire-kickers who churned quickly.

I found that by having larger packages, we could charge more and provide more value to the right set of clients.

This pushed us up-market to larger brands who would get more out of our services and gave us more margin to build our team. It’s also allowed me to pay myself a fair salary, despite just being a few months into running the business.

Lower Costs

If you cannot raise your prices, the other side of the coin is lowering costs. Can you deliver the same work with fewer employees? Are you overpaying for software? Can you cut capital costs like office space or vehicles?

Typically, high-growth businesses should not focus on cutting costs, but if you’re in a mature, competitive market, this might be your best option.

Make More Sales

Snap Selling book cover

Sales is probably the most important skill an entrepreneur can have. Assuming that each unit you sell can be delivered at a profit, one way to increase your take-home pay is to simply sell more.

I didn’t have a sales background, so I relied heavily on my network to drive the first sales at Draft.dev. One book that helped me change my perspective on sales was Snap Selling by Jill Konrath.

Her thesis is that the biggest barrier you have to closing sales is that your customers are busy. It’s impossible to get people to focus on your solution when they have a million competing priorities, so you have to make your sale so easy and customer-friendly that they can say “yes” effortlessly.

Build Systems

The Emyth Revisited book cover

I am shocked by how much busy-work a lot of entrepreneurs do. Every hour you spend filling in payroll, tracking your expenses, and creating invoices is an hour you are not either growing your business or enjoying the fruits of your labor.

One of the best ways to pay yourself a higher effective rate is to build repeatable systems for your business and then put good employees in a position to carry out those systems.

“Isn’t hiring more people expensive?”

In the short-term, maybe, but if hiring someone for $20 per hour frees you up to make more sales, isn’t that a trade worth making? If paying $100 per month for a piece of software gives you one more hour every week to grow your business, isn’t that a fantastic trade?

One book that was life-changing for me on this topic was *The E-Myth Revisited* by Michael Gerber. In the book, Gerber explains the value of creating systems (the “franchise prototype”) so that you can focus on growing your business instead of carrying out every minute task along the way.

A lot of entrepreneurs undervalue their time and overvalue cash. You can make more money, but you can’t get time back.

Let Go of Limiting Beliefs

Beliefs will impact your behaviors which will impact your results.

Entrepreneurs who believe they should only be paid $50,000 per year will only be paid $50,000 per year. I’ve fallen into this trap so many times but having a good group of peers and mentors to help me see the truth has always helped.

Surround yourself with people who are positive and have a growth mindset. Don’t be your own biggest barrier to running a successful, profitable business.

Is Being an Entrepreneur a Good Career Move?

First, entrepreneurship isn’t for everyone. Even if you understand the risks, it’s not an easy path. Most entrepreneurs never get a massive payout, and if the salary estimates are right, many are making less than a fresh college graduate.

But there’s more to being an entrepreneur than just money. Having the flexibility and freedom to run a business the way you see fit is extremely liberating. You can kick off early any day of the week, swap the days you work, or meet up with friends at any time of day.

Starting a company can be hard work, but it can also be very rewarding. Enjoy the journey, even if it’s not the most lucrative career move you ever make.

Interested in learning more about entrepreneurship? Here are my favorite books for founders to help you get started on your journey.

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