How Much Do Small Business Owners Make?
Perhaps you’re a seasoned professional looking to start your own business. Or maybe you’ve already started your business and want to know how you’re measuring up.
It’s important when starting a new business that you figure out what a fair amount to pay yourself is.
So, how much do small business owners make? Keep reading to find out.
What is a small business?
First, we need to set out some terms. What, exactly, is a small business?
Most people would agree that a shop with a couple of employees counts as a small business. But how far can you go before a small business stops being a small business?
In general, a small business is a privately owned corporation, partnership, or sole proprietorship that has fewer employees than ‘average’ sized companies. If that sounds pretty vague, you’re right on the money.
The definition of a small business varies from country to country. In Australia, a small business can have no more than twenty employees. In the European Union, a small business must have less than 50 employees and have an annual turnover of less than €10M. And in the US, a small business is determined by the amount a company makes, the industry it’s in, and the number of employees. Some companies could have turnovers of more than $40M or 1,500 employees and still be considered ‘small’.
Naturally, the size of the company will affect the amount the business owner is likely to make.
Owners pay themselves
When you own a business - particularly if you have a partnership or limited liability company - you get to determine your own salary.
Different business owners pay themselves different amounts, for a variety of reasons.
According to CNBC, owners can pay themselves differently, at different times, for different reasons. Some business owners are afraid to take a salary of any significant amount and prefer to invest right back into their business. Others choose to pay themselves more, commensurate with their contribution to the company.
Melanie Hopkins, the founder of Finance Friend, told CNBC that owners should tend to pay themselves something.
“People must be paid for their work,” she says. “They don’t, because they have a scarcity mentality and fear that even if they’ve budgeted and everything looks good, they have to keep money in the business bank account. Not paying yourself leads to burnout, so carving out even a modest monthly payment is essential.”
The difference between profit, salary and dividends
You might think that if you own the business, your fortunes will rise and fall with that of your company’s profits. While there is truth to this, there are also a lot of things you have to consider.
Profit
A business is in profit when it generates revenue that is larger than its expenses. What a business owner does with those profits is up to them. Most decide to reinvest in their business by hiring new employees and buying new technologies. Others might save a good portion of their profits for a rainy day. Still others might decide to use profits to increase their own income, the income of their workers, or pay their shareholders through dividends.
Salary
Some business owners may assume that all profits should go to them. While this may be feasible in a sole trader situation (where the owner and the business are the same legal entity), it may not be the best strategy when you’re in a partnership, limited liability company, or corporation.
In these types of business structures, business owners tend to take salaries. These salaries are subject to change more easily than the salaries of regular employees since they are controlled by the business owner.
Dividends
If you operate a limited company, it’s possible to have your income based solely on dividends. Dividends are money paid to shareholders of a company once a company makes a profit. Dividends are distributed by shares. So, if you have 20% of the company’s shares, you get 20% of the dividends distribution.
Businesses can only distribute dividends once all other expenses have been paid. You may also have to pay taxes on your dividends, depending on your jurisdiction. And, needless to say, if your company makes no profit, you will not be able to pay yourself.
What does the average small business make?
Small businesses make up the vast majority of most economies. According to the Small Business Administration, there are 30.2 million small businesses in the US. These businesses employ 58.9 million people, making up 47.5% of all US employees.
The profits of each business will vary widely according to its industry, expenses, sales, location, and more.
According to Statista, the amount of profit a small business makes is directly correlated to the number of employees it has. Businesses in the UK that have 0 employees (ie sole traders) made about £9,000 in profit on average in 2018. Businesses that had 50-249 employees made around £250,000.
Factors that can affect small business earnings
Here are some factors that can affect the business, and, by extension, the owner’s income.
Industry
Small businesses in certain industries are bound to make more money than those in others. For instance, a construction company may find it easier to make a big profit than a sole trader in graphic design.
The solutions that businesses offer clients, and the demand for these solutions, will be the key to their success.
Size
As stated above, the size of a business can massively impact its revenue. As your company expands and you hire new employees, your capacity to work will increase, therefore resulting in more profit. It’s far more likely that a business with 300 employees will have a larger revenue than a business with just three as the work output will be higher.
Location
A physical location can make or break certain businesses. If you own a business in the hospitality or retail sectors, your business’s revenue is dependent on a good location with lots of foot traffic. This means more customers making more purchases.
Your location can also affect what you pay for rent. It’s far cheaper to rent an office in rural Nebraska than in the middle of Manhattan, but that cheaper rent might come with decreased prestige and an inability to make regular contacts.
Quality of management
Business management is at the heart of making your revenues grow. Effective management that can eliminate waste, motivate employees, increase efficiency, cut costs and give strategic direction to your teams will make your business a revenue-generating machine.
Investments
Part of making your business more efficient means investing in the right areas. For instance, investing in the right technologies is a sure-fire way to increase your worker efficiency.
You really can’t underestimate how much good tech can change your business. At Epos Now, we’ve seen how machines like our point of sale system can drastically increase the productivity and sales of our customers.
Make sure you’re investing in the right things to make your business a success.
The average income of small business owners
Here’s the average salary for small business owners around the world, according to Payscale:
- US: $70,000
- UK: £30,000
- Australia: $27/hour
- New Zealand: $69,000
- Ireland: €38,500
It must be stated that the above figures are averages and not representative of what even the majority of small business owners make.
