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Setting Salary in a Husband & Wife Business Plan
By The BIDaWIZ Team - February 19, 2010 Share:
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This is a common question when a husband and wife are preparing a business plan. Before we get into the accounting aspect of this scenario, let's first discuss the importance of understanding the financial model of the business.
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Understanding the Financial Model
When building a business plan it is important to understand the financial model under various best and worst scenarios on both the revenue and expense side. No matter the type of business, it is essential to have a very strong grasp of the revenue growth rates in the industry and market size in order to run scenarios on how fast or slow the business will grow. On the cost side of the financial model, it is important to understand how much startup costs and recurring costs (admin, marketing, accounting, etc.) will be incurred while also being able to achieve profitability.
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Then
there is the time factor. The business will go through stages of
growth like all startups so being able to model the company's
progression over time is critical.
Yes, there are some predictions involved in building a financial model and you may be wrong, but you need to try as best as you can to understand all of the revenues and expenses to determine when you should be showing a profit and over what point in time.
Accounting For Salary
Now back to the accounting side of this topic. Whether you show a salary above your profit line or below is somewhat dependent on the type of business entity you are forming and the partner/member vs. employee relationship that you have with your wife.
For instance, if you chose to incorporate as a S Corporation you would be required (per the IRS) to show a salary that is reasonable in your industry above the profit line, even if both you and your wife are corporate officers. If you are not going to incorporate, whether you pay yourself a salary above the profit line or take a distribution doesn't matter since you and your wife would receive a k-1 and report the income and expense on your tax return.
On a side note, if you don't incorporate you and your wife maybe subject to double self employment tax unless you decide to treat one spouse as an employee rather than a partner.
Good luck with your new venture and remember constantly update your business plan - it should be a living, breathing document.
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