Hopping on the entrepreneurship train is a demanding and rewarding journey. To be successful there are so many important principles to know and abide by – some formally taught in business school (or various online courses and forums) and others that you really only learn along the way in the school of hard knocks, even if you’re lucky to have a mentor to guide and prepare you for them in advance. 

While many launch their business as ‘side hustles’, they do so in the hope of eventually taking their business full-time and going the distance by investing all that they have (financially and otherwise) into the vision they hold for their business. Terms like ROE (return on equity) and ROI (return on investment) are thrown around and it is easy to assume the only way to really excel is to pour all of your life savings into the venture. After all, hustle culture seems to encourage it and so many influencers talk about that being part of their journey. ‘Go big or go home’ right? 

They’re so many business coaches offering online courses and coaching where their key marketing tactic is a call to you to ‘invest in your business’. ‘You’ve got to spend money to make money’ they say. Which is true, but as with most other things, there are some caveats to keep in mind! 

Skin-in-the-game, sweat equity and equity injections are crucial, but it’s also important to ensure that you’re setting up yourself as an individual for success in the long game. The temptation to channel each penny earned back into the business to pursue aggressive growth is unrelenting but you still need to secure yourself which means – paying yourself a livable wage, compensating yourself for hard work and ensuring you’re able to occasionally enjoy the things that refresh and energize you.

Practically speaking, ‘paying yourself’ can either be in the form of a monthly salary, drawings, dividends or even a combination of these. Whether and how you can use these methods depends on the structure of your business. There are also pros and cons of each of these methods that should be considered.

A salary is more stable and a recurring expense you can budget into your operating costs however, you do pay taxes on your income. As a salaried worker, you pay yourself as you would an employee of the company which means including this as an operating cost and making the necessary statutory deductions and paying income taxes. From the company’s perspective, these salaries are also tax deductible as they reduce profits and taxable income, and therefore the amount of corporation tax due.

Admittedly, in Trinbago there is less legislation (and enforcement) surrounding caps placed on salaries as compared to countries like the US, where there are compensation restrictions that require salaries to be comparable to similar roles in the industry.

Dividend distributions, on the other hand, are deducted from retained earnings and are currently non-taxable to TT residents when obtained from TT resident companies.

While flexible and adjustable based on company performance, they are only available as a compensation method to registered shareholders of the company and must be paid proportionally. This means that all shareholders must be paid in relation to their percentage of the shareholding though in reality, there may only be one shareholder involved in the day-to-day operations. It is often suggested to pay yourself a fixed percentage of the business’s profit so that compensation can be adjusted according to the performance of your business. This compensation method is available to limited liability companies.

Drawings can be taken out of the available cash of a business but are limited by the equity position of the company. This method is available to sole traders, partnerships, and limited liability companies. For limited liability companies however, these drawings are usually in the form of salary advances, shareholder/director loans etc and are meant to be repaid and so may not strictly be deemed as compensation measures but rather perks.

Important to note is that as partnerships are not legal entities, they are not assessed corporate tax. Instead, the net income of the partnership is allocated in accordance with the shares in the partnership. This income is taxable at the usual personal income tax rates.

While many entrepreneurs do not take any money in the early stages of their business, once you are on firmer footing and have a good idea of operational costs and cash flow needs of the business, your compensation (whatever form or method it may take) should be factored into the business expenses and forecasts. Your compensation, at a minimum, should ensure your ability to cover personal obligations (including taxes). An early decision regarding your compensation will also assist in keeping accurate financial records which help understand the true cost of your operations.

Imagine if you invested all you earned into your business only for it to be swallowed up whole by the force majeure that was COVID-19 or – if your memory can go further back – the financial collapse of 2008? Their far-reaching and sustained effects were both grossly unanticipated but felt immediately. For many months of COVID, many industries remained closed with no idea of when they’d be allowed to operate again, leaving many a business owner grappling with mounting business and personal expenses and no idea of where funding would come from to cover them.

Sure, many have bounced back to some degree, but those months were difficult for even those in a financial position to bear it. In fact, that’s exactly my point! Your business is likely able to bounce back (after all, with you behind the wheel how can it not 😏?), but what about you – the brain and hands behind the business?