The business plan is the heart of every start-up. It serves, so to speak, as a signpost for the company to be successful in the first few years and to be able to establish itself on the market. As a rule, the business plan consists of two components: a written part and a financial plan. The latter contains a large number of calculations to ensure that the start-up’s finances are solid from the start. These in turn serve as a basis for decision-making for investors, banks or other lenders. In addition, the founder can (better) see for himself whether the business model can be viable at all, i.e. financially lucrative. This financial plan is in turn divided into several sub-plans. One of them is the capital requirements plan.
The entrepreneur’s salary in the capital requirements plan
As the name suggests, this first part is primarily about determining the capital requirements. In the second step, it can then be checked how this can be covered. A mix of equity and debt capital is common. A component of this capital requirements plan (external link) are also the running costs that are incurred after the business has been set up. Typical examples are rental costs for an office or bank charges. However, not only operational expenses are taken into account, but also the private expenses of the entrepreneur. After all, they have to be able to make a living from their business – otherwise they have missed their basic goal. For such expenses, he pays himself an entrepreneur’s salary, which is one of the running costs. We are then talking about the so-called imputed entrepreneurial wage. It is usually calculated generously because, in addition to fixed costs, it also takes into account unforeseen events, such as the entrepreneur losing work due to illness. The only question that remains is how this entrepreneur’s salary is correctly calculated in the capital requirement plan?
Differences between the legal forms
There is no general answer to this question, because the extent to which an entrepreneur’s salary is paid and calculated sometimes depends on the legal form of the company founded. For example, anyone who works as a managing director or board member in a corporation such as a UG, GmbH or AG can pay a regular monthly salary. This is treated like a normal employee salary for tax purposes and at the same time reduces corporate taxes as an operating expense. The person concerned may also be subject to social security contributions (external link). In the case of partnerships, on the other hand, an entrepreneur’s salary is paid out, which, however, is treated as a withdrawal for tax purposes. It must therefore be taken into account in the calculation. When founding a company, it is therefore important to clarify in advance with the tax consultant in what form the imputed entrepreneur’s salary can and should be paid out.
For whom is the imputed entrepreneur’s salary relevant?
Anyone who works as a sole proprietor, freelancer or owner of a partnership must theoretically first make a profit in order to be able to pay an entrepreneur’s wages at all. Because this is considered a private withdrawal and therefore does not reduce the profit. The entrepreneur’s salary therefore appears neither in the profitability overview nor as an expense, but is part of the liquidity overview. The imputed entrepreneur’s salary is therefore only relevant for planning capital requirements for partnerships and sole proprietorships, but not for corporations. The aim is to take into account the work performance of the entrepreneur in order to generate sufficient profit. The entrepreneur’s salary counts as a cost component in the product calculation.
Calculate the entrepreneur’s salary correctly in the business plan
There is no one right way to calculate the entrepreneur’s salary as part of the calculation for a partnership or a sole proprietorship. Every founder is therefore free to choose his own method of determining his private financial needs. In plain English, the founder plans how much money he intends to withdraw from the company each month in order to partially or fully cover his living expenses. Additional profit withdrawals are of course possible at any time. What sounds complicated means nothing other than calculating your private expenses. How generous the founder proceeds here is at his own discretion. Of course, the goal should always be that the company remains economically healthy. An imputed entrepreneurial salary that is too high in the business plan can therefore have a deterrent effect on potential investors. It is therefore important to remain realistic and modest at least until the company has established itself on the market and is making a constant profit.
The components of the entrepreneur’s salary
In principle, the calculation is made up of several components in order to determine the optimal entrepreneurial salary. This includes:
- household (Rent, groceries, telecommunications and internet, garbage fees, electricity and heating, etc.)
- leisure (Hobbies, club fees, clothing, holidays, going to restaurants, etc.)
- monetary and tangible assets (Interest on loans, real estate, securities, account fees, etc.)
- insurances (Life, health, accident insurance, etc.)
- reserves (Tax reserves, pension plans, unforeseen events, etc.)
- Miscellaneous (Maintenance payments, kindergarten fees, repairs, etc.)
All these expenses are budgeted and totaled annually. This results in the sum of the amount that is required by the entrepreneur as private income per year. If necessary, this can also be reduced by additional income from other sources, for example if the start-up takes place as a sideline or the life partner generates additional income. Such other income can therefore be deducted from the capital requirement. Only then is the required entrepreneurial wage determined.
Special case: Insurance in capital requirement planning
Insurance represents a special case, because a distinction must be made here between insurance costs that have to be covered by the entrepreneur’s wages and those that are considered pure operating expenses. For example, commercial liability insurance is deducted directly as an operating expense. The situation is different with private insurance: As a rule, the self-employed are free to choose which form of health insurance they want. Many of them opt for private health insurance because it not only brings some advantages financially (external link). However, these insurance costs, as well as those for private pension insurance, private legal protection insurance, private liability insurance and other policies that are not directly related to the company, must be covered by the entrepreneur’s wages.
What “market standard” means for the entrepreneur’s salary
Of course, it makes sense not to save in the wrong place, especially when it comes to pension benefits for old age, for a possible illness, etc. Nevertheless, the bottom line is that the entrepreneur’s salary should remain in line with market practice. As already mentioned, potential investors can otherwise be deterred. In the case of corporations, the tax office also plays a role. If the entrepreneur’s salary is set too high there, it is regarded as a hidden profit distribution. The salary that the entrepreneur pays is therefore not to be equated with a profit distribution that can also take place. If you gamble too high here, you risk consequences such as high back taxes. It is therefore important to research the usual market wages for entrepreneurs and to orientate yourself on them in the business plan. However, these are only average values that apply to established companies. In most cases, it is therefore not realistic and not customary in the market to estimate an average of 389,000 euros (external link) as an entrepreneur’s salary in the first year. The aim should therefore be to reduce private spending to a minimum, at least at the beginning, in order to make financial planning sound and realistic from the point of view of investors (e.g. venture capitalists), banks, etc.
Tips to push the entrepreneur wages
One way to keep entrepreneur wages low(er) has already been mentioned: additional income, whether from the entrepreneur or another member of the household, is a great way to do this. However, the list of costs also shows savings potential, for example by terminating unnecessary contracts, perhaps for the fitness studio, or switching to cheaper providers, be it for electricity, mobile phones etc. Savings can often also be made when it comes to old-age provision, but it is allowed nonetheless, these should not be neglected. It makes more sense to generally establish a modest lifestyle and to make the best possible use of the tax advantages as an entrepreneur (external link). Working from home or leasing a company car are just two of many examples.
Don’t forget to look to the future!
As already mentioned, the business plan serves as an orientation for the first year or the first years after “starting your own business”. If business is going well, the entrepreneur’s salary may of course rise at some point. So it’s worth taking a quick look ahead and calculating how private withdrawals could increase if the company develops as desired. This is not only important for the calculation, but also for your own motivation.
Tip: With subsidized business start-up advice for the creation of a business plan, you not only save, you are also on the safe side when it comes to investors and taxes. For more grants, see Grants.