How to pay yourself from your startup company
You’ve spent the last 12 months working furiously on your startup company. You’ve traded sleep for coffee. You’ve forgotten what colour the sky is. But have you thought about how to pay yourself?
Well yes, because you’re reading this. Excellent. There are different ways to go about it, depending on how you’re set up. We recommend setting up both:
1. A company
2. A family trust (also known as a discretionary trust) to hold your shares in the startup company
Hang on a minute, please don’t let your eyes glaze over. It can be tempting to take the quick option of setting up a partnership or just a company (without a trust as well). Or to simply pay yourself as a contractor from your business. But the startup company + trust set up is (usually*) the best option.
Here’s why a company + trust is usually best
- A company has more legal rights than other structures, which comes in handy if you need to protect yourself against legal action
- If you want to apply for the R&D Tax Incentive, you have to be a company (and this is too good to miss out on if you’re eligible)
- You’ll have better options to pay yourself, as a founder
- You’ll pay less tax on any income you receive (compared with being a sole trader)
And as if that wasn’t enough: You’ll also have more options at exit time.
For example, if you sell all the shares in your company and you’re the sole shareholder, you’ll get whacked by capital gains tax. That means losing up to 45% of your profit to the tax man. Whereas with a trust, you have absolute flexibility of deciding who to distribute the end dividends to (as a beneficiary of the trust) and you can decide this when you need to, such as at the time of exit.
And finally, it’s messy, time consuming and expensive to change structures down the track. You will hate it.
How to pay yourself with this set up
Once you’ve established your company and family/discretionary trust, there are two main ways that you can be paid.
- As an employee
This means the company will process a payroll payment to you. It also means the company needs to do the back-end stuff, including paying PAYG tax to the ATO quarterly (through BAS statements), paying your nominated super fund quarterly and accounting for it all in end-of-year reporting.
- Dividends from the company
The company can use its profits to declare dividends to shareholders. Since your shares are held by your trust, the dividend payment will go to the trust and it can distribute the dividend to its beneficiaries (members) as it sees fit, thereby reducing the amount of tax due.
And please don’t forget, you should definitely pay yourself back for any loans you made to the company or expenses you covered, before paying yourself as an employee or shareholder. Why? Because you don’t have to declare it as income and also, potential investors in future won’t want their money to pay existing debt. They usually expect outstanding founder loans to be converted to equity.
Paying yourself as a contractor?
You might be considering paying yourself as a contractor by invoicing your own company.
We don’t usually recommend this to our clients.
In theory, it is possible to a limited extent but you should be aware that your startup might still have to pay superannuation and workcover anyway because of the ATO’s personal services income regime, which is likely to apply if you’re earning most or all of your income from your own startup company.
Help, my eyes are bleeding
Fair enough. You didn’t found your startup company so you could labour over all this. Startup savvy advisers will set you up without charging you the earth and keep things as simple and lean as possible. That’s what we’re here for.
* If you’re an ‘IP heavy’ startup company with patent or licensing possibilities, you should consider setting up a separate company to hold your intellectual property, alongside an operating company.
As always, please don’t take our articles as personal tax, finance or any other kind of advice. You need to speak to us for that.
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