A limited liability corporation (LLC) can help protect your personal assets and give you more flexibility than a corporation when running a business. If you own an LLC, you will pay yourself as a kind of “employee”, or member, of the business.
However, how you pay yourself will depend on the type of LLC you have and how many people are members of the business. While having an LLC gives you some of the benefits of a corporation, your income will mostly be treated as if you were operating as a sole proprietor, with a few exceptions.
Here’s how to pay yourself with an LLC, depending on the type of LLC you have.
Single-Member LLCs
If you are the only member of your business, your business income and personal income are considered the same, similar to a sole proprietorship.
While you won’t have a salary, you will pay yourself through an owner’s draw. You’ll write yourself a check or issue a direct deposit from your business account to your personal account. You’ll want to keep careful records of your business income because, as with a sole proprietorship, you will still owe taxes on your income. You can pay estimated taxes throughout the year or pay the IRS when you file your tax return. However, waiting until the filing of your return may result in underpayment penalties.
Writing a check or issuing a direct deposit is the best way to keep track of payments. Although you can pay yourself as much and as often as you want, be sure you have enough funds to continue to run and grow your business as necessary.
Multi-Member LLCs
Multi-member LLCs can have as many members as they want, although they will be viewed as partnerships by the IRS. Since they are seen as partnerships, multi-member LLCs are pass-through entities.
With a pass-through entity, your business isn’t taxed by the IRS, but every member of the LLC must report their earnings on their personal income tax return. In addition, you will still need to report your business income, even though it won’t be taxed.
Each member of the LLC will pay themselves through an owner’s draw, or multi-member LLCs can set up regular payments that would function as a salary. Multi-member LLCs can also be taxed as corporate LLCs if they wish.
Corporate LLCs
Corporate LLCs are LLCs that are taxed like a corporation would be—either an S corporation or a C corporation. In order to be a corporate LLC, you must request to be taxed as a corporation through the IRS. In this case, members of the LLC are now shareholders, and instead of taking owner’s draws, they are employees.
Employees of corporate LLCs still pay themselves a salary through payroll. Unlike multi-member or single-member LLCs, the IRS withholds taxes from this income. Corporate LLC “employees” must ensure their salaries meet reasonable compensation requirements, meaning they would be paid amounts similar to if they were traditional employees.
Each employee of a corporate LLC can also pay themselves out of the business’ profits without having tax withheld. However, they will still have to pay taxes on the business profits, either through estimated taxes or when filing their tax return.
Choosing Your Compensation Method
Salary or Owner’s Draw: Decide how you want to be compensated from your LLC, either through a salary or owner’s draw. Your choice can impact taxes and financial structure.
Managing Salary (If Applicable)
Determining a Reasonable Salary: If you opt for a salary, decide on a reasonable amount that reflects your job responsibilities within the company.
Setting Up Payroll: Establish a payroll system if you’re taking a salary. This will handle tax withholding and reporting requirements.
Tax Withholding and Reporting: Ensure compliance with tax withholding and reporting responsibilities, especially if you have employees besides yourself.
Taking Owner’s Draws (If Applicable)
Withdrawing Profits: If you’re not taking a salary or want access to profits beyond your salary, you can take owner’s draws.
Maintaining Financial Separation
Separating Personal and Business Finances: Maintain a clear separation between personal and business finances to ensure legal and tax compliance.
Documenting Transactions: Keep records of all financial transactions related to your payments.
Adhering to Legal Requirements
Following State Laws: Comply with your state’s specific rules and regulations related to LLCs and compensation.
Managing Taxes
Paying Income Taxes: Be prepared to pay income taxes on your LLC income, whether through salary or owner’s draws.
Consulting with Professionals: Seek guidance from tax professionals and CPAs who specialize in small business and LLC taxation.
Filing Tax Returns: Ensure that you file the appropriate tax returns, either individual or business, based on your LLC’s structure.
Operating Agreement Considerations
Reviewing Your Operating Agreement: Check your LLC’s operating agreement for any restrictions or guidelines related to paying yourself.
Navigating LLC compensation involves various aspects, including salary, owner’s draws, financial separation, taxes, and adherence to legal requirements. Consult professionals for personalized guidance based on your specific situation.
Do I Have to Pay Myself With an LLC?
Technically you don’t have to pay yourself with an LLC—you can leave your business profits alone, but this doesn’t prevent them from being taxable. You’ll still need to report any profit earned from the business on your personal tax return.
Do you have an LLC but aren’t sure what the best way to pay yourself is or how to budget for taxes? Contact Scharf Pera & Co., PLLC to book a consultation for business consulting, tax preparation, or financial consulting services today.