December 19, 2022

Why distinguish between salary and profit?

If you’re a solo operator, what really is the benefit of separating your salary from your profit?

To be sure, there are some non-trivial tax advantages, but that’s not the star of the show.

IMHO the biggest benefit is the mental shift of looking at your salary as a BAD thing (i.e., cost), not a GOOD thing (i.e., profit).


Because it creates a powerful financial incentive for you to find ways to create real leverage in the business (i.e., ways to make money while you sleep).

In other words, it helps you start thinking like an owner, not an employee.

There’s a giant mental difference between living off of your SALARY as the sole EMPLOYEE of your business vs living off of your PROFITS as the sole OWNER of your business.

In the context of an expertise-based business, having to pay out salaries (to yourself or anyone else) implies that you are packaging your expertise as labor, which is a very low-leverage way to package expertise.