Segregate to conquer 🏆
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.
🎧 Podcast recommendations
A few of you may know that I’m obsessed with podcasts. I’m always listening, making notes, and sharing with friends when I think they could also benefit from the content. So this is a new section in which I will be adding my podcasts recommendations for the week that could be (or not) related to finance and business. Hope you guys like it and let me know what you thought of each episode.
▶️ Bad Blood - The final chapter: for those of you who have also read the book and are following the evolution of Elizabeth Holmes’ trial for Theranos’ scandal, this is the podcast lead by the book author John Carreyrou that tells in his unique way how the case evolves. It’s just awesome and scary to see how far someone can go in order to fit the ‘fake it until you make it’ culture in Silicon Valley startups. A must listen!!!
▶️ Founders’ Filed Guide with Gabby Dizon - Mapping the Metaverse Economy: Gabby is a good friend of mine that made the headlines a few weeks ago but announcing a fundraising round with a16z for his company Yield Guild Games. In this episode, the mastermind in traditional asset management Patrick O'Shaughnessy explores YGG decentralized structure, the unit economics of its business model in a unique way. Congrats on the fundraising Gabby!!
This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.
In a world full of noise, I’m hoping to bring clarity and direction to your finance processes so you can manage your business in peace. If you find the content useful, do your friends a favor, and please share this newsletter with them.
See you all next week 👋🏼
Leticia
Love the podcasts!