There is no greater feeling than enjoying the fruits of your labor. As a business owner, you pour passion and dedication, invest time, money, and energy to ensure your business succeeds. And as the saying goes, your efforts will pay off one day.
You’ll know when your hard work has paid off by checking different financial statements like cash flow statements, statements of owner’s equity, balance sheets, and income statements. If you want to know how much you can pay yourself as a business owner, owner’s equity is the detail to check.
In this article, we’ll discuss what owner’s equity is, the balance sheet details that come with it, and how you can spend your earnings once you’ve received it. Let’s begin!
What is owner’s equity? It’s the assets you own in the business, minus any liabilities. Owner’s equity is what it’s called if your business is operating on a sole proprietorship. It is called a stockholder’s or shareholder’s equity when a company is a limited liability company (LLC) or a corporation.
How to calculate owner’s equity? Again, owner’s equity is a company's assets minus its liabilities. The money includes your initial investment and business profit. Hence, an owner’s equity shows how much money you have left after paying all your expenses.
Owner’s equity can be positive or negative. Positive owner equity is when the assets are higher than the liabilities. It can be negative equity when the company's liabilities exceed its assets.
Although seen as excess money when the equity is positive, it is not considered a company asset but more of a liability as it is the money the company owes to the owner or the shareholder. Nevertheless, it is considered your asset once you claim it through an owner’s draw.
As a business owner, you work as hard as possible to see your business succeed. Long work hours are now a part of your routine as there are a lot of business areas you need to be on top of. Despite having many tasks you need to accomplish, do not forget to pay yourself. For you to gain more strength to run your business, give yourself fair compensation. How? Here are the ways!
If you are the company's sole owner and work more than 40 hours a week, an equity draw is the best payment method for you. Here, you can withdraw part or the whole of your owner’s equity. Before you decide how much to withdraw, it is best to check the total amount of equity there is.
If the owner's equity is negative, you can still withdraw money, but it will come from your business’s capital and will now be tagged as capital gains. Capital gains will reflect in your income tax returns and are taxable.
Meanwhile, if you have positive equity, you can withdraw any amount. These draws are also taxable despite not being included in the payroll. You still need to declare it in your income tax to pay the correct dues.
Owner’s draw can also be in non-cash forms, like getting a discounted purchase from company vendors for personal items.
If you want to receive a fixed amount regularly, it would be best to count yourself as a company employee. This way, you can include yourself in the payroll and receive a salary as scheduled. This payment is beneficial as you can receive monthly payments to sustain your personal needs. You can continue your business course without worrying about your expenses as your salary will cover them.
When you receive your monthly salary, you will be charged payroll taxes like a regular employee. Nevertheless, your salary will be categorized under business expenses, which can lower your net income and decrease the business’s taxes.
Guaranteed payments are a compensation form that works best for partnerships or LLCs. This payment method ensures you, your partners, or members of the company get paid whether the company has a positive or negative profit. For additional security, terms and conditions of guaranteed payments should be established clearly and written and signed.
A guaranteed payment isn’t taxable, unlike salaries and owner’s draws. A guaranteed payment is tagged as partnership income and categorized as a business expense. It lowers the company's net income and contributes to lowering the taxes your company has to pay.
Dividends are the company’s retained earnings and profits that can be given to you and to shareholders. Dividends are distributed to shareholders as a form of gratitude and to fulfill their purpose in investing, which is to get a return of investment. Continuous giving of dividends encourages shareholders to continue investing and partnering with you as they see the fruits of their investments. Note that dividends can be paid in shares or in cash.
To ensure the accuracy of your calculation of total owner’s equity and earnings, it is best to rely on bookkeeping and accounting software like QuickBooks, Xero, and Sage50 cloud. To begin with, these tools track all the inflow and outflow of cash in your company through bookkeeping. It will automatically compute your company’s assets and liabilities, which are crucial to getting the correct computation of your equity.
A bookkeeping and accounting software can also generatereports and financial statements automatically. Whether you choose owner's equity, a shareholder's equity, to be a part of the payroll, guaranteed pay, or dividends, you know what amount you and other shareholders will receive. When you know exactly how much you will get, you can plan how to spend your earnings wisely.
Once you’ve determined how you will get your share of money from the company’s profits, make sure that you also know how to spend it wisely. Here are some ways to do just that!
Experience the rewards of your hard work by spending your owner’s equity, salary, guaranteed payment, or dividends on yourself. You can use it to pay for your needs and wants. Since you are now a business owner, you can also make the most of your income by enrolling in programs and training that will help you become a more efficient business manager.
Of course, you cannot go wrong with the famous 50-30-20 budgeting hack to ensure you spend your money wisely. Allocate 50% of your income for your expenses, 30% for your wants, and 20% for your savings.
It is standard for businesses to get loans to increase the money they can use for business operations. Getting loans can also spike your company's money in case you are planning for growth.
However, interest rates are increasing, so one way to spend your income wisely is to assist your business in paying liabilities owed. Once you’ve paid off your loans or credit card debt, you can allocate your succeeding income and company profit to the needs of your business operations instead of paying interest.
You can get plenty more benefits from paying debts, like improving your credit score and less stress on your end because you won’t have any interest and debt worry moving forward.
You can grow your business using the money you earn in different ways. First, you can let your income be retained and not claim it. In doing so, your business will have extra money to use for operations.
You can also withdraw the money and invest it in improving your business, like purchasing new office or factory equipment, investing in new software, or giving back to your team. Forms of giving back include skills and knowledge development and team building activities that promote employee wellness and company culture.
These forms of giving back will benefit your business as you have tools to optimize your operations and a motivated workforce.
You are now knowledgeable about owner’s equity, how to pay yourself as a business owner, and how to spend your earnings wisely. Remember that equity is the money a business owes to the owner or the shareholder and can be calculated by subtracting liabilities from assets.
Aside from equity, there are other ways to pay yourself including salaries, guaranteed payments, and dividends. To ensure accurate calculation, it's recommended to use bookkeeping and accounting software. Finally, remember the several ways to spend your earnings wisely, including paying off debts and investing in growing your business.If you need assistance generating financial statements, knowing owner’s equity, or in bookkeeping, partner with us at Unloop! Let us help you track, monitor, and understand your finances so you can make informed decisions. Contact us now!
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.