This article is part of the newsletter OpenBooks crafted by LiquidCFO and was originally posted in Substack. You can access the original content here.
We hear many stories about CEOs that never paid themselves anything or have a 1-dollar annual salary. This can’t put the CEO in a more dangerous position with tax authorities and creditors.
The most important thing in paying yourself a salary as a CEO is to keep clear boundaries between your personal and business assets.
But my company cannot afford to pay me a salary since I’m bootstrapping it – I hear you say. Just stick to the minimum wage required for your jurisdiction. Whenever there is an audit or a creditor claims ‘commingling of funds’ between your company and personal assets, nobody is going to argue against the low paying level you were under when the company was not making enough revenues.
Another alternative for bootstrapped companies would be deferred compensation but that is highly controversial (especially if you aim to take funding at some stage). Paying yourself as a contractor until the company has reached a certain level of revenue is also not a great solution, since it can lead you to legal and tax liabilities. The solution then: just put yourself on the payroll. Simple as that.
This article shows that CEOs of venture-backed startups paid themselves an annual salary of $146k in 2021, but I appreciate that this is for a very narrow segment of the entrepreneurship world.
Never – under no circumstances – move away from paying yourself a salary. Remember that when it comes to taxes and accounting policies we are always operating in a grey zone. The more ‘substance’ you create (ie. the more accurate processes in place you have), the higher the odds that you will be able to protect personal assets claims.
Asset protection is about protecting your personal wealth from the threat of business liabilities, which can be a real danger for both you and your business. Reduce risk by insulating your business and personal assets from the claims of creditors. Remember that not only banks but vendors and the tax authorities are creditors when it comes to tax and supply payments. This means that nobody is protected.
I want to wrap this up with two more aspects that are relevant for personal assets protection. The first is choosing the right corporate structure. The simplest option may seem to operate as a sole proprietorship but in terms of asset protection, this is not the best choice. Get a structure in your jurisdiction that will strengthen the protection of your personal assets. We will have an article on this topic later on.
The second and final piece of advice is to get business insurance. The beauty of the startup industry is that you can get coverage by a small amount of money that will save a tremendous headache in the future. In jurisdictions such as the UK and the US, it is mandatory to have business insurance (here and here are some options).
I hope this article comes as a wake-up call for business owners out there that have been using reimbursements as the main way to pay themselves. Start by correcting your payroll now and you will thank me in the future.
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