Many Americans dream of owning their very own small business. Most are drawn to the promise of independence, autonomy, and working hard on something that belongs completely to them. And, of course, there’s the lure of the money and possibly growing a small business into something bigger than you’ve ever dreamed of.
What many new entrepreneurs don’t realize, though, is that most small business owners draw a salary, rather than taking money out of the business at will. Most of a small business’ income goes to pay operating costs or to reinvest into growing the business. In reality, the average small business owner's salary is based on a number of factors.
Factors That Affect Small Business Owner Salary
The salaries of a small business owner in the United States range from $29,462 to $160,606 a year, according to PayScale, a compensation research company. The average business owner salary is $59,000 per year. Included in those numbers are bonuses, profit sharing, and commissions. The average yearly bonus for small business owners is $6,250. The average profit sharing is $20,234, and the average commission is $15,000.
There are a number of factors that affect where you might fall on the average small business owner salary scale. Experience is one of the biggest ones. The more mature your business and the longer you’ve been doing this work, the more likely it is that you will have a higher salary. Small business owners late in their careers average $95,753 in yearly salary.
Another factor is the location. Business owner salaries often run parallel to the cost of living in the area. For instance, the average business owner salary in New York City and in Raleigh, North Carolina, are very different. The industry of choice will also affect the average salary because owning a restaurant will pull different numbers than a construction business. The wage gap that affects most industries also affects small business owners. Generally, women make 80 cents for every dollar men make. So, the average business owner salary for female owners is $47,200.
How to Determine Small Business Owner Salary
If you’re looking for a magic formula for how much salary to take as a business owner, you’re out of luck. There’s no one way to make that decision. However, it’s helpful to know some basic numbers to help you along the way.
Think about the compensation options available. A straight salary option is the cleanest in terms of accounting because the payments are very clear in the books. You can also consider a salary plus bonus or commission structure. This allows you to have regular payments, but also extra payment if business is good. Some owners also prefer compensation in the form of stock options, which may be less complicated at tax time.
Next, let’s figure out what your bottom line is. What is the least amount of money you can take as the business owner? Generally, you do this by calculating your living expenses per month and then multiplying by 12. So, if you need $3,000 a month to pay your mortgage, car note, utilities, etc., you can’t take less than $36,000 a year as an owner salary. No matter what the other numbers say, you know that is the very lowest it can go.
The next thing you should do is consider what your business could afford to pay you. It doesn’t matter if your living expenses are $100,000 a year if your business isn’t earning enough to pay you that. If your business is a startup that hasn’t been turning a profit, you might find that there’s very little it can afford to pay you as the owner. In fact, many owners don’t take a salary at all in the early days of their business.
Finally, consider what a similar job might pay you for similar work. Considering your experience and skills, how much could you make on the open market? Check the resources of trade magazines or trade organizations to find out the salaries of the owners of similar businesses. This will give you an idea of what makes sense for your industry.
Once you’ve determined your salary, make sure you reassess it regularly. If your business is still in its early days, it’s smart to take another look at it every six months or so. If your business has matured, you might reconsider it yearly. Whether your business is succeeding or floundering, your salary as the owner should follow its lead.