I’ll never forget the time I saw a $5,000,000 W-2. The owner’s business model had paid off, and now he was reaping the rewards. I remember that W-2 when asked for guidelines on owner’s compensation in a small business: the first rule of thumb is to pay yourself as much as the business can afford. After all, the business of business is making money, so if you make it, take it.

Unfortunately, too often a business doesn’t make money, but the entrepreneur takes it out anyway, essentially debt financing – to dangerous levels — excessive owner’s compensation. That’s bad. Don’t debt finance your paycheck.

Your business will tell you how much it can afford. At the same time, it should meet your income goals. If it doesn’t, you either need to refine your goals, change your business model, or find another way to make money. But the business itself needs to get paid. It needs money to grow - a reserve of working capital so you can make strategic decisions, not fear-based ones.

Owner’s compensation decisions aren’t made in a vacuum of course. If you’ve got business partners or investors, they’ll be paying close attention to how much you make. Your banker, too, might have something to say about the matter, as might your employees if your company has some degree of Open Book Management.

Then of course there’s the IRS and a host of income tax-related considerations. Take too much W-2 and you risk landing in a higher income tax bracket. Tilt your company’s benefits programs too much toward yourself and you might not pass discrimination testing. At the other end of the spectrum, if you take too small a W-2 as an S Corp. shareholder you might be accused of payroll tax avoidance.

Finally, don’t tank your financial statements through excessive compensation. The P&L and the balance sheet should tell a good long-term story about your business in order to attract reasonably priced debt financing, as well as investors when it comes time to execute your exit strategy. Nothing screams, “value!” more than a disciplined, well-run business.