As an employee, your earnings are based on a different system than that which determines the amount of profit your employer makes. Working for a wage provides you with a degree of stability that an entrepreneur working for a profit does not have, but it also limits your overall earning potential to the amount of your hourly rate.
Advantages of Wages
If you are a wage earner, your employer has made a commitment to pay you a set amount for every hour you work. Unless your company goes bankrupt or tries to cheat you out of your rightful earnings, you are guaranteed to earn this wage in exchange for working these hours. This provides you with a degree of stability and security. You can create a budget for yourself based on the amount that you know will be in your paycheck.
Advantages of Profits
Your employer's earnings are based on the company's profits, or the amount that it earns after its expenses have been subtracted from its gross receipts. If business is good and expenses are under control, your employer could earn a considerable income. In fact, some entrepreneurs do get rich from the profits their companies make while few workers get rich working for wages. Some business owners set up their companies so they can earn a profit without doing any work themselves.
Disadvantages of Wages
Although you can be reasonably certain of making your hourly rate as a wage earner, your earnings are limited to the amount of your wage and the number of hours you work. Windfalls for the company do not necessarily translate into windfalls for you, except in the sense that windfalls might provide you with extra hours that you can work in exchange for your set wage. Whether you are busy or idle during your work hours, you will still earn the same hourly wage.
Disadvantages of Profits
Although the company you work for earns a profit when the business is successful, the entrepreneur who runs it may experience periods when he earns less money than your wage, or no money at all. This is particularly likely when the business is new and he is building "sweat equity," or investing his time in building the value of the company. When business is bad, the entrepreneur who runs your company may even lose his savings and investments on a business that costs him more to run than it earns. In addition, he is likely to experience periods when he works extra hours with little or no compensation simply to keep the business running.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.