How Do Business Partners Get Paid?

Dec 29, 2020
6 minute read

As a business owner, you want to make sure you can pay your own bills, set yourself up with financial health, and even take a break here and there. This means personal income, and it’s impossible to live without. But how can you get paid as a small business owner, a partner, or a shareholder of a corporation?

How your business type affects how you get paid

How your business is structured will directly impact how you get paid. Not all business structures pay the same and how much you earn depends on the state of your business’s financial health. For many small business owners and entrepreneurs, this might mean lower personal income. There are different requirements for filing and paying taxes for each business type, which will also affect how you get paid. 

Let’s look at how each business structure works and which type would work best for you

Sole proprietorship

A sole proprietorship is the simplest business type, generally encompassing newer entrepreneurs and small ventures. When it comes to your personal income, sole proprietorships offer both pros and cons.

As sole proprietorships are not legal entities, all the decisions and responsibilities are solely the owner’s responsibility. This can be really beneficial if your business is booming, but it also means all finances rest squarely on your shoulders. Labour and overhead costs, procuring capital, and debts are all your personal responsibility. 

A sole proprietor is not an employee, but rather you are a self-employed entrepreneur. This affects your personal income tax as the profits are all yours. For tax purposes, this exposes you to potentially quite a few tax write-offs such as transportation, part of your living expenses if the bulk of your business is conducted from your home, including internet, hydro, gas, and the like. These are personal tax credits, which are all rolled into your personal tax return (self-employment tax return). While this is not direct income, it does increase the money your business gets to keep and therefore, you can choose to draw an income from it or reinvest it back into your business. 

As sole proprietorships tend to be fairly small businesses, you might not get paid for a while until your venture gets off the ground. Budgeting for this should be done at the outset. A business plan can help you with this.

One of the biggest drawbacks to a sole proprietorship is the unlimited liability. You personally have no liability protection, and any debts or litigation will expose your personal assets like real estate, vehicles, and even savings and reduced credit rating. 

Partnerships

Partnerships vary slightly from sole proprietorships in that there are two or more partners invested in the business as owners, and the legal requirements of a partnership are clearly outlined. While a partnership is still not a separate legal entity, and the partners are also personally liable for business debts, how partners receive an income depends on a partnership agreement. 

Similarly to sole proprietorships, partners’ income is directly reflective of the business profits. However, each partners’ income is set out in accordance with the partnership agreement and how much each partner has invested in the business, whether that be capital, labour, or other costs. The profit, if there is any, is then distributed among the partners accordingly. 

Just as any contractual agreement, a partnership agr