How Do Entrepreneurs Make Money? 3 Ways To Pay Yourself

Turning passion into profit is about understanding the mechanics of making money as an entrepreneur. While innovation and motivation drive entrepreneurs to create something new, sustainable success requires a clear strategy for generating income.

In fact, according to the US Bureau of Labor Statistics, about 20% of new businesses don’t survive their first year. This highlights a key reality: Although innovative ideas may be what inspires an entrepreneur to build a business, truly successful entrepreneurship means making money and setting your ventures up for long-term success. Here’s how to do it.

What exactly is an entrepreneur?

An entrepreneur is a person who creates and/or runs their own business, often taking on financial or personal risk in the process. But this definition only scratches the surface. True entrepreneurs embody passion, grit, drive, innovative thinking, risk tolerance, and the determination to succeed against the odds.

For many, entrepreneurship is as much a mindset as it is a business venture. The rise of the creator economy has helped broaden the scope of what it means to be an entrepreneur. Today’s entrepreneurs take many forms: a startup founder, a full-time ceramicist, and a TikTok influencer could all fall into this category.

Entrepreneur vs. business owner

An entrepreneur differs from a business owner—someone who specifically owns and often operates their company. Business owners focus on the daily operations of their companies, managing resources and ensuring they continue to make products and provide services that meet customers’ needs. While they may innovate, they typically prioritize maintaining the continuity of successful operations.

There is plenty of overlap; many entrepreneurs also own and manage a business they created. However, some business owners buy and operate an existing company without making major changes, which is generally not considered entrepreneurship. Additionally, even after an entrepreneur sells their business, they often retain their entrepreneurial identity. In general, entrepreneurship involves more risk, innovation, and scalability.

How do entrepreneurs make money?

Entrepreneurs make money by building and expanding profitable businesses that offer valuable products or services. Their income varies depending on the specific area and industry, and many entrepreneurs earn money in multiple ways.

For example, an organic produce company may sell its products in stores while also offering a bi-weekly or monthly subscription box that generates recurring revenue. In the digital goods realm, a business coach may sell online courses directly to clients through their own website, while also licensing their teaching techniques to other coaches. An industrial designer could patent a game they created and license the patent to a toy company.

Successful entrepreneurs don’t just focus on a single revenue stream. They seek opportunities to innovate and diversify their income. By adding complementary products, entering new markets, or leveraging technology, entrepreneurs can hedge risks and maximize profitability over time.

In the Silicon Valley-style startup model, where many entrepreneurs seek an exit event like a buyout or an initial public offering, equity is the primary method entrepreneurs use to realize returns. When the business is sold or goes public, the founder’s ownership stake in the business can be quite valuable, even if the company hasn’t earned a profit. However, any business owner can potentially make money from selling their company if that’s their end goal.

How to pay yourself as an entrepreneur

Now that you understand how entrepreneurs make money, it’s essential you know how to compensate yourself for your work. In the early stages of a business, some entrepreneurs choose to reinvest in the business rather than pay themselves to create greater value—and a greater payout—in the future. That said, you can pay yourself as a business owner in a few ways:

Owner’s draw

This is common for sole proprietorships, partnerships, and limited liability companies (LLCs) taxed as disregarded entities or partnerships. You simply take money from your business bank account as cash flow permits. However, you remain responsible for paying estimated income and self-employment taxes and keeping accurate financial records.

Salary

This is required for S corporations or C corporations, where you pay yourself a regular salary, like an employee. You’ll need to establish a payroll process, and the salary is subject to payroll taxes (Social Security, Medicare, and unemployment).

Distributions and dividends

For S corps and LLCs taxed as S corps, you can take distributions, which reduce the owner’s equity in the business (since they effectively move capital out of the company to you as an individual). Dividends are after-tax profits from a C corporation that are distributed to owners or shareholders, rewarding them for investing in a profitable business.

How entrepreneurs build profitable businesses

1. Find a profitable idea
2. Develop and validate your product
3. Draft a business plan
4. Launch your new business
5. Manage the business

Success in entrepreneurship requires innovation, vision, and a unique skill set to develop offerings that create value for your target market. Here are the essential steps to become an entrepreneur and succeed:

1. Find a profitable idea

The product or service you choose for your business is your foundational decision—one of the most important ones you will make. While every business idea comes with trade-offs, you can minimize risk by finding the right niche with growth potential.

These questions will help you evaluate the merits and drawbacks of your business idea. To answer them, you’ll need to invest in market research to understand the wider landscape and define your target audience.

• Does this product or service serve a passion or solve a problem?

• Is this a growing category, a stable trend, or merely a fad?

• What is the competitive landscape in the industry?

2. Develop and validate your product

After deciding what you will sell, consider your options for product development. You might make physical products by hand, partner with a manufacturer who can build to your specifications, purchase wholesale products in bulk to resell, or leverage dropshipping if you don’t want to hold inventory.

Next, you’ll need to validate your product idea, confirming there’s interest in and demand for your product. Consider these validation strategies:

• Send online surveys to potential customers

• Build a Coming Soon page 

• Create a prototype or minimum viable product (MVP), and conduct user testing

• Set up a pre-order process

• Start a crowdfunding campaign

• Run test marketing campaigns

• Conduct deeper market research, focusing on demand

• Study your competitors’ products and methods

• Run a feasibility study 

Finally, ask yourself how your product fits in the market: Does it expand an existing category, disrupt a legacy category, or create a new category?

3. Draft a business plan

Now it’s time to write a business plan—a document that outlines every aspect of your business. It covers core details and plans, including the cost to start the business and where you will obtain funds, who you can reach and market to, your business model, what you will charge for each product, the product lines you will offer, and your marketing strategy.

Your business plan will serve as your company’s roadmap, helping you stay on track and execute your carefully formed strategy. This free business plan template can help guide you through the process.

4. Launch your new business

Choose your business name and legal structure. Create a store launch checklist to plan your opening day. Schedule launch day marketing plans, like posting on various social media channels. If applicable, plan for customer support or at least an easy way for customers to contact you if they need help. Then, focus your time and energy on making your first sales.

5. Manage the business

You’ll learn more about business simply by doing the hard work; whether you ever take a business class, successful business owners continuously learn and adapt. Effectively managing a business includes honing your people-management skills, fostering company culture, assessing and planning for evolving business risks, measuring performance, and recovering from setbacks.