How do I compare a monthly salary with an entrepreneur's income?

When starting a business from scratch, answering this question relies entirely on projections. With a franchise system, however, there are real-world figures available – often provided by the franchisor – which you can draw on as a solid basis for your planning.

Many aspiring founders who are interested in franchise concepts will be familiar with the "average profit" figures from their research into the systems' key metrics.

Please note: a company's annual profit is not the same as an annual employee salary.

As an employee, there is one number you know off the top of your head: your monthly net salary. By the time your payslip is issued, your employer has already deducted all costs and contributions, and the amount transferred to your account is yours to keep. The key point is this: you know exactly how much money you have each month, and that figure essentially never changes.

As a self-employed entrepreneur, things are different. Here you are personally responsible for settling your tax and insurance costs, and both your organisational and personal circumstances have a strong influence on what you are left with at the end of the day.

Therefore, you should never directly compare the net salary from employment with the profit from self-employment.

The actual income of entrepreneurs depends on many different factors.

Some of the most important ones are:

• Profit
• Legal structure of the business
• Insurance levies
• Other personal tax situation

No business operates without expenditure. In simple terms, annual profit is calculated by taking revenue (or income) and subtracting all operating costs (or expenses).

Profit = Revenue – Operating Expenses

Operational expenses are directly linked to the purpose of the business and arise from the consumption of goods and/or services in the course of delivering outputs. These include salary payments, rent, interest, and travel costs.

Operational expenses therefore reduce profit – and, of course, taxable income. Because it is the profit that is taxed.

Self-employed entrepreneurs who do not qualify for the "small business scheme" are also subject to VAT obligations.

TIP: When you see franchise descriptions mentioning the level of profit, this is exactly what is being referred to here.

Capital companies, such as a GmbH or AG, can claim the salaries of their management as an expense in their annual financial statements and balance sheet, thereby reducing taxable profit.

For sole traders, the situation is different. This is because no clear distinction is made between the business and its owner. As a result, entrepreneurs must rely on private drawings to cover their living expenses.

As a sole trader, you are considered a "natural person" under the law and are therefore subject to income tax. Limited companies, on the other hand, are "legal entities" and are subject to corporation tax (essentially the "income tax for corporations").

The corporate tax rate is fixed at a set percentage, whereas the income tax rate is progressive – meaning it increases as income grows.

As a shareholder in a limited liability company, there are various ways to structure an income – each with different tax implications. If a monthly salary is paid out, this is subject to income tax (progressive rate), whereas profit distributions are subject to the (flat-rate) capital gains tax.

Due to the tax allowances and varying tax rates, good tax advisers will aim for a combination here.

As an entrepreneur, you are generally subject to statutory social insurance obligations – just like any employee. There are differences in the amounts and purposes of the contributions required across the various DACH regions.

In Germany, entrepreneurs who own more than 33% of their company's shares also have the option of not contributing to the statutory social insurance scheme.

Bear in mind that, unlike salaried employment, being self-employed does not automatically entitle you to statutory unemployment insurance or health cover. You can, however, opt to make voluntary contributions in order to protect yourself should the need arise.

As mentioned, the income tax rate increases with the level of total income.

This means that two franchise entrepreneurs generating the same annual profit will, in all likelihood, pay different amounts of tax, depending on their personal circumstances.

Fundamental factors include:

• Tax class
• Spousal income splitting (Germany only)
• Income from another source (e.g. from renting out a property)
• Child tax allowances

You can also deduct costs such as further training, technical equipment, specialist literature, and much more from your income tax.

The monthly salary is therefore the result of a highly personal and complex interplay of many different factors, making it difficult to determine in advance.

Especially when you are used to the regularity and security of a monthly pay cheque, the idea of this entirely new approach to securing your livelihood can easily bring you out in a cold sweat.

To gain a clearer picture, we recommend having open conversations with existing franchisees. You will typically have the opportunity to meet them during the mutual get-to-know process with the systems that interest you.

It is essential that prospective founders seek advice and ongoing support from tax experts. Not only is this simply unavoidable, but the (financial) benefits will, as a rule, far outweigh the costs.