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Loaning To Your Business To Pay Yourself a "Proper" Salary


#1

We were recently visiting one of our largest clients down in New Orleans. We had a chance to meet with their founder and CEO who also happens to be very involved in the startup scene down there.

He gave us some advice - that we should be paying ourselves proper salaries. More along the lines of $1m/year each. While we’re scaling very quickly, we currently can’t afford to actually pay those out. So he said we should be setting them up as a personal loan to the business. He said he wished he did this sooner with his company as eventually the business does need to pay them back.

I really like the idea, but as I’ve looked around I haven’t found much information about this. Has anyone heard of this or done something similar? If so, definitely curious to hear about any sort of tax ramifications you ran into!

Thanks!
Tom


#2

Personally, I don’t agree with this. You may end up worrying too much about your salary, as opposed to your business. At the beginning, I don’t think you can properly evaluate a salary, until you clearly know how much your business can generate.


#3

I guess it’s worth clarifying. The business is already generating millions and is growing very rapidly.

But as we are growing most of that cash is going towards adding employees to grow the biz further. Essentially we just don’t have the cash on hand to pay the $1m/year salaries yet.

His thoughts were more for our families and ensuring they are setup to be rewarded for all the time we spend on the biz.


#4

All the advice I’ve heard from people who have run successful businesses: Pay yourself first. So your client’s advice is right in line with that. Also, congratulations on your success! What kind of business do you guys do, if you don’t mind sharing?


#5

We basically partner with mobile app developers to allow their users to take in-app surveys in exchange for premium content. So rather than paying $1 for 100 Gems in a game, you can take a survey to get them for “free”.

So we essentially partner with the market researchers who have the surveys connect them with the publishers who have users who want virtual currency.

Yea, his advice is in line with that. Mainly just trying to do a gut check since I’ve never heard of “giving a loan” to the business based on the salary you should be making / not actually giving the business cash as a loan.


#6

Ok, then I clearly misunderstood. Congrats, and yes, in that case, your client was right.


#7

I think the obvious answer here is to ask a good local accountant. If your business is generating millions, it would be foolish to make any decision without talking to a professional about it.

I’m in Canada, and if I were to pay myself a $1M salary, the government would take over 50% of that. A better approach here is to have a holding corporation that owns your active business, so you can transfer profits from active corp to holding corp tax free. Then you use the holding corp as your retirement strategy. Instead of taking $1M per year, you take what you need and leave what you don’t need in the holding corp (invested in stocks, bonds, etc). When you sell your active business, you’ll still own your holding corp and all the money accumulated in it – hopefully enough for you to make a living from passive investments. Again, this is a popular strategy for business owners here in Canada. I have no idea about other countries.


#8

I agree with this, see your accountant for best strategy. Even for a successful company I am not sure taking $1m out a year is the best thing tax wise.


#9

At those levels of salary, the advice seems a bit bizarre as you do have to pay tax on salaries declared and not transferred.

However, in any context, it’s really worth investigating what tax write-offs are available. I know in the US there’s something about writing off your mortgage costs (not available in Australia but we have our own property-related dodges).

I’m assuming you are already paying yourselves some living wage so this is about getting more money on the company books now vs later.

As general advice, and you really need a good accountant to look at this, consider scenarios such as the business liquidating or being sold. If things go badly and the business lacked the money to pay out all its creditors, you would get nothing. If you are on the books for long-term loans that may give you more claim.

Similarly, for a modest acquisition, you might get more back to pay out those loans than the net paid in buying the business. For a sliding tax scale, it may mean less total tax as the tax you pay now on the loaned-back income accumulates to less than would be imposed on a lump sum.

I don’t know how US tax works on the Capital Gains tax of selling a business. Here in Australia, that’s taxed differently from your normal sliding income tax. That needs to be considered.

As an example from the small-end of the scale, for anyone following this thread, if you are in a country with a tax-free threshold and you are working for nothing providing sweat equity, you really should pay yourself at least up to that threshold. That lets the company accumulate losses it can write-off against future income.


#10

Hey Tom, did you eventually talk to a local accountant or expert about this? I’m curious as to what you eventually decided to do.