2009 Small Business Guide
small business
The pros and cons of forgoing a salary

The negative side

Declining to pay yourself has obvious negative consequences. "Your business exists primarily as a way to generate income unless it's a hobby or a passion play," says Sloan. "Obviously you don't want to find yourself caught on a road where there is no clear path to restoring your salary. If you don't have a clear path identified, you'll get off the road, and you aren't likely to get back on."

Lawrence Gelburd, who teaches small-business courses at Wharton and is an entrepreneur himself, urges small-business owners to take at least some salary. "I'm definitely in the minority and usually fail to convince people, but if you have too little cash, it's a negative because you're busy worrying about your rent rather than your business," he says.

Unless you are clearly overpaid, forgoing salary can cause multifaceted damage, says Cloutier. "Obviously if you were making $1 million a year, you can suffer a reduction, but you want to value your position in the business," he says.

"You shouldn't be working for nothing. It hurts your own personal credit and self-esteem. It wreaks havoc on your family. It really is a signal that something is wrong with your business and has to be changed," he says.

Indeed, Cloutier and others say that if your enterprise isn't making enough money for you to draw a salary, you have to examine whether your business model is viable. And you may have to consider whether the business itself can realistically succeed.

"It's important to determine if forgoing a salary is the result of the economy or a flawed business," says Sloan. To be sure, it can be quite difficult to objectively evaluate a business to which you have a huge emotional attachment.

"An entrepreneur's greatest asset is his or her passion," he says. "But the most common mistake is buying into the hype that comes from passion and emotion for what should be a rational and logical decision-making process."

Sloan acknowledges the delicate balance between passionate belief that allows an entrepreneur to sacrifice for the short term when success lies down the road and passionate belief that leads owners to stay aboard a sinking ship.

"It's more of an art than a science," he says.

When deciding the fate of your business, especially if you are considering bankruptcy or liquidation, consult with other entrepreneurs, accountants and lawyers if you can. They can help you to understand the full implications of your decision.

At DeadSolid Golf, Cheskiewicz is sticking with his business. Once the economy rebounds, he believes his firm will recover. "I think that will happen well into next year," he says. "Longer than that, I don't think we can survive."

One way to save money if you don't take salary is through barter, Gelburd says. For example, if you're a computer programmer, perhaps you can do technology work for your landlord in exchange for reduced rent.

If you do opt out of paying yourself, "call it deferred salary," says Gelburd. "Don't allocate yourself $1 trillion for running a pizza stand, but track dollars and hours. You may never get it paid off, but at least you've measured it."


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