Founder Distributions
Your startup is profitable. You have cash. Should you take distributions or reinvest? Here's the framework.
You've built something profitable. For the first time, you can actually take money home. But should you? How much? And what's the tax-efficient way to do it?
The Tension
Taking distributions reduces company cash for growth. But reinvesting everything means you never benefit from the success. The answer depends on your goal: build a 10x company or build a sustainable lifestyle business.
When Distributions Make Sense
Take Distributions When:
- You're generating 20%+ EBITDA margins consistently
- Growth is slowing (expansion phase is over)
- You have 12+ months of runway in the bank
- You want to signal stability to your team
- You need cash for personal reasons (down payment, tax bills)
Don't Take Distributions If:
- You're in a growth phase (25%+ YoY growth)
- You have significant debt or obligations
- Runway is less than 18 months
- You're planning a major initiative (new market, product)
Distribution Amount Framework
How much to take out depends on your business and goals:
Conservative: Take 25% of EBITDA
Reinvest 75%. This preserves capital for opportunities and growth.
Moderate: Take 50% of EBITDA
Reinvest 50%. Balanced approach. You benefit while maintaining growth investment.
Aggressive: Take 75%+ of EBITDA
Reinvest minimally. You want cash more than growth. Lifestyle business.
Tax-Efficient Distribution Strategies
Work with your tax advisor on this, but common approaches:
Salary vs Distribution
Pay yourself competitive salary first ($100-150K). Then take distributions of profits. Salary is deductible, distributions are pass-through.
Timing Matters
Take distributions when you have the most other deductions (reinvestment in equipment, hiring). Lower taxable income.
Entity Structure
S-Corp vs LLC vs C-Corp have different tax implications. Consult your accountant on the best structure for you.
Frequency
Monthly vs quarterly vs annual distributions. Doesn't matter for taxes but affects cash flow management.
Reinvestment vs Distributions: The Real Tradeoff
Example: You have $100K annual EBITDA. You can either:
Option 1: Take $50K Distribution
You get $40K after taxes. Company has $50K to reinvest. Next year: maybe $120K EBITDA. You take $50K again. This builds a sustainable business.
Option 2: Reinvest All $100K
You get $0. Company reinvests $100K. Next year: maybe $150K EBITDA. You still take $0 but the company grows. Eventually you sell for $10M. Your 60% stake = $6M.
Which is better? Depends on your timeline and exit goal. If you want lifestyle income: take distributions. If you want to build a 10x business: reinvest.
Planning Distributions?
Eagle Rock CFO helps founders model distribution strategies, understand tax implications, and balance owner returns with business growth.
Get Distribution Strategy Consultation