Business

How to calculate a start-up entrepreneur’s wage

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You need to not forget to calculate a start-up entrepreneur’s wage when founding a business. The entrepreneur’s wage is the remuneration of an operating partner in his or her own company. However, the calculation of the entrepreneurial wage is often neglected in the financial planning of a young company, which can have a serious impact on liquidity planning.

What should you pay attention to when you calculate a start-up entrepreneur’s wage, we will show you below. 

The entrepreneur’s wage is part of the business plan!

For the creation of of the business plan is a detailed Budget which provides an overview of planned costs and future sales. When calculating the costs incurred, it is important to include all investments and costs that affect the liquidity of the company. An important cost factor, which is often overlooked by founders, is the wage for entrepreneurs.

The wage for entrepreneurs is the remuneration of the activity of a shareholder of the company. Therefore, if you create a company, we must not forget the payment of the entrepreneur’s wage in the financial planning. Finally, you must continue to bear the cost of private living even after the foundation. Therefore, the entrepreneur’s wage is absolutely part of the calculation of your capital requirements for self-employment. You should first determine your private costs. These are the basis for the entrepreneurial wage to be set – later, of course, you can also calculate with a higher wage.

Calculate a start-up entrepreneur’s wage: this is how it works

What factors do the level of one’s own wage depend on? When calculating your compensation, it is recommended to consider the following three questions:

  • How much capital is required for my private life?
  • How much capital should I withdraw from society without doing so economically?
  • In the case of a corporation: What is a standard ceo salary on the market?

Especially to start a business and in the ensuing period, sales are often still low and profits small or scarce. It is therefore necessary to define an entrepreneurial wage which is sufficient to cover private costs but does not put the company in difficulty. 

To calculate the cost of private living, you should include the following points in the calculation of the entrepreneur’s wage:

  • Household (rent, non-residential costs, food, telecommunications, clothing, etc.)
  • Car and leisure (holiday, cinema, gifts, etc.)
  • Finances (loan interest, loan repayment, taxes, etc.)
  • Insurance (sickness, liability, household insurance, etc.)

Also remember to create reserves for any prepayments or subsequent tax payments. The payment into the pension insurance or any other type of old-age insurance should of course also be included in the entrepreneur’s salary – however, you can do without it in the start-up phase due to a lack of capital in the first few months. 

If you are not sure about the expected private expenditure, you would rather calculate a little more generously. This does not leave you in a direct financial distress even in the event of unforeseen events such as accidents or prolonged illnesses. 

5 tips to keep the entrepreneur’s wage workable

All beginnings are difficult. At the beginning of an independent activity, there is often a lack of awareness among the targeted target group and, as a result, sales are correspondingly low.

Therefore, it is advisable to keep the entrepreneurial wage as low as possible in the early days of business, so that as a founder you can make ends meet. Paying a lavish salary directly is out of place here. These five tips should make saving easier and to kept the entrepreneurial wage low:

  • Pensions
    In the first few months, refrain from creating pension reserves. However, in later stages, as soon as you generate higher sales, it is important to include retirement provision in the calculation of the entrepreneur’s wage. 
  • Modesty in lifestyle
    If you decide to become self-employed, you have to choose a more modest lifestyle in the early days. Avoid expensive restaurants, holidays and unnecessary luxury.
  • Partner
    If you live in a partnership and have a second income, you can ask your partner for support in the early months.
  • Leasing
    Of course, you can make savings not only in the private but also in the business sector, in order to have something more left over for your entrepreneurial wage. By leasing machines, plants or vehicles, expensive acquisition costs can be avoided and tax advantages can be achieved.
  • Home Office
    For example, if you work as a freelance business consultant, journalist, or web designer, you don’t necessarily need your own office. Visit your customers on site and save the cost of rent at the beginning.

There are many other ways to reduce costs and thus push the required entrepreneurial wage even further. To do this, make a detailed list of your costs and try to keep all unnecessary expenses to a minimum during the start-up period.

By the way: Your entrepreneur’s wage should not stagnate at this low level for several years during your planning. As sales rise, you should also increase your wage.

Why entrepreneurship pay is also important

The calculation of the entrepreneur’s wage is crucial for the correct financial planning of the start-up and should therefore not be neglected. But also for external stakeholders such as investors, the entrepreneurial wage is of course part of the financial planning. 

If the wage of the entrepreneur is not taken into account, the Investors not have a flawless picture of the value of a company. Likewise, it makes at the bank meeting not a good impression if you do not include the presentation of the entrepreneur’s wage in financial planning.

In front of external stakeholders, you should therefore be able to present the level of your defined entrepreneur’s wage in a comprehensible and credible manner.

Entrepreneur’s wage for partnerships and corporations

Although the concept of the wage for entrepreneurs always means the same, it differs, in particular from a tax point of view, depending on the form of a company.

In the case of sole proprietores and partnerships, however, it is not possible to pay for the activities of the shareholders in this form. Instead, the company’s equity is reduced as part of private equity. Very importantly, these withdrawals, also known as profit anticipation, must not have a profit-reducing effect as an expense and thus reduce the tax burden. The capital withdrawn is used in individual companies and Partnerships also referred to as the calculation of the company’s wage and should be included under this name in the cost and performance calculation.

The market-standard entrepreneurial wage for corporations

You can calculate a start-up entrepreneur’s wage several times during the early years. If business is going well, you can of course raise your entrepreneurial wage and, for example, invest more money in your private pension. In the case of individual companies and partnerships, you can freely define your calculated entrepreneurial wage – there are no limits here, as long as external stakeholders such as investors or banks are not involved. 

However, as a shareholder in a corporation, you must be careful to define a normal salary for the calculation of the entrepreneur’s salary. If you exceed a certain amount, the managing director’s salary can be regarded by the tax office as a hidden profit distribution. This can have far-reaching consequences, such as high tax repayments. 

But what is a market-standard CEO salary? This depends on many factors, such as:

  • the company’s industry,
  • the number of employees as well as
  • the turnover of the company.

As soon as you, your co-founders and/or especially your employees receive a salary, you must not forget payroll accounting. As a rule, however, you should not do them yourself, but leave it to a tax advisor. 

Attention: Profit distribution

First, what should not be confused with the wage for entrepreneurs is distributions of profits to the shareholders of the company. This is particularly important: for corporations, where the shareholders do not necessarily have to pursue an operational activity in the company.

As a managing partner, one can therefore benefit twice from a well-run company: on the one hand, from the entrepreneur’s salary in the form of a managing director’s salary and at the same time from the distribution of profits to the shareholders of the company.

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