Running your own business comes with freedom and flexibility, but also one big question: how do you actually pay yourself? The answer depends on your business structure. Sole proprietors, partners, and corporation owners all have different rules, responsibilities, and tax considerations.
It starts with your business structure
Before diving into payment methods, it’s important to know how your business type shapes your options:
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Sole proprietorships – You and your business are legally the same entity. There’s no separation between business income and personal income.
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Partnerships – Profits are split among partners based on the partnership agreement. Each partner pays taxes on their share.
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Corporations (C corps and S corps) – Legally separate from the owner. You’re treated like an employee and must follow payroll rules, with the option of dividends or distributions.
The structure you choose affects not only how you can pay yourself, but also how much you’ll owe in taxes.
Three Main Ways to Pay Yourself
Here are the three most common methods small business owners use—and the pros and cons of each:
1. Owner’s Draw
An owner’s draw simply means taking money out of your business account when you need it. Think of it as “drawing” from profits.
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Who it’s for: Sole proprietors, partnerships, and LLCs taxed as sole proprietorships or partnerships.
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How it works: You transfer money from your business to your personal account, then report business profits on your personal tax return.
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Pros: Flexible and easy. You’re not tied to a fixed paycheck.
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Cons: Taxes are still owed on the business’s overall profits—not just what you take out. It can also make budgeting trickier if your draws are inconsistent.
Example: A bakery owner who takes draws during busier holiday months but less during slower summer months.
2. Salary
Paying yourself a salary means you’re an employee of your own company.
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Who it’s for: Required for S corporations and C corporations. Optional for LLCs taxed as corporations.
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How it works: You set a fixed paycheck, deduct payroll taxes, and file like any other employer.
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Pros: Predictable income, easier to budget for, and looks professional for banks or lenders.
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Cons: More admin—payroll, tax withholding, and reporting.
Example: A consulting business owner who sets a monthly salary to cover living expenses, then reinvests leftover profits back into the business.
3. Distributions & Dividends
This method applies mostly to corporations and some LLCs.
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Who it’s for: S corps, C corps, and LLCs (depending on tax status).
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How it works: After paying yourself a reasonable salary (for S corps), you can take additional profits as distributions. C corps can issue dividends.
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Pros: Often more tax-efficient than taking everything as salary.
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Cons: C corp dividends face “double taxation” (corporate tax + personal tax). Rules are stricter, so you’ll likely need help from an accountant.
Example: An S corp marketing agency owner who pays herself a base salary and then takes quarterly distributions when the business is doing well.
As a small business owner.....
Most new owners start simple. If you’re a sole proprietor or running an LLC without corporate election, an owner’s draw is often the easiest way to go. It gives you flexibility while your business finds its rhythm. The key is to separate your business and personal accounts, track what you take out, and make sure you’re setting aside money for taxes. As your business grows, you can transition into a more structured approach, like paying yourself a salary or combining a modest salary with distributions.
| Method | Best For | How It Works | Pros | Cons |
|---|---|---|---|---|
| Owner’s Draw | Sole proprietors, partnerships, LLCs | Withdraw money directly from business profits. | Simple, flexible, no payroll setup needed. | Taxes still owed on full profits, can be unpredictable for budgeting. |
| Salary | S corps, C corps, LLCs taxed as corporations | Pay yourself like an employee with regular paychecks and tax withholdings. | Predictable income, easier for loans, helps with tax compliance. | Requires payroll admin, less flexible than draws. |
| Distributions / Dividends | S corps, C corps, LLCs (with election) | Take additional profits (S corp = distributions, C corp = dividends). | Can be tax-efficient, allows mix of salary + extra income. | C corp dividends face double taxation, stricter rules apply. |
How to pay yourself smartly as a business owner
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Plan for reserves. Keep 3–6 months of business expenses saved. This gives you breathing room when sales dip or costs spike.
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Don’t underpay yourself. Especially if you run an S corp, the IRS expects a “reasonable salary.” Paying yourself too little could trigger penalties.
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Separate business and personal accounts. This makes taxes cleaner and shows lenders you’re running a professional operation.
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Balance your needs with growth. Your pay should cover your living costs while leaving enough cash flow to keep your business healthy.
It will always be about balance
At the end of the day, paying yourself is about more than just taking money out it’s about creating a sustainable system. The right method should:
✅ Meet your personal financial needs
✅ Protect your business’s stability
✅ Leave room for future growth
There’s no universal answer. Some small business owners prefer the flexibility of draws, others the predictability of a salary, and many use a combination of salary plus distributions. What matters most is finding the system that works for your life and your business.
Want more tips on running a sustainable business (and shipping sustainably while you’re at it)? Check out our blogs!
