Monday, December 13, 2010

Ownership and Employment are Separate

Most business owners and entrepreneurs co-mingle their ownership of and employment at their businesses. But they are really separate things. And the more they can understand this concept, the more effective they usually are at running their business.

I was recently impressed by a story I read in the USA Today about an entrepreneur who understands the difference between employment and ownership better than most. Lola Gonzalez laid herself off to save the jobs of the rest of her employees. She still owns the business, but she no longer reports for work every day. She even found another full-time job.

How much do you earn from your business because you are employed by it? How much do you make from your business because you own it? Yes, each question should have its own answer.

One of the reasons these concepts are confused relates to the way owners pay themselves. With pass-through entities, especially s-corps, commonly used by entrepreneurs, earnings for employment and profit-taking as an owner are often combined, or at least not looked at in terms of a fair market wage for an active owner.

Here is what every business owner should do--figure out how much you would have to pay someone to replace yourself. If you are currently making less than that, then its time to figure out how to grow your business or make it more profitable so that you can at least earn what the market is willing to pay. If you're making only that amount, then you're really not getting any benefit for being the owner, other than the fringe benefits of owning a "lifestyle" business that provides employment. If you are taking home more than your wages, then you are getting the best of both worlds--a good-paying job and some financial reward for risking everything you have, including your time, to build your business.