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If you’re a business owner looking into forming an LLC, or have just completed the process of registering your business as an LLC, you may find yourself encountering a number of new logistical questions. While an LLC is a less complex structure than a corporation, this business type comes with its own quirks. If you have prior experience running a sole proprietorship, it may take some adjustment to run an LLC.
In this article, we’ll cover everything you need to know about getting paid as a business owner running an LLC.
How do I pay myself from my LLC?
The easiest and most efficient way of doing this is to simply write yourself a check from your business account and deposit it into your personal account—this is called the owner’s draw. It’s very simple! These funds are taxed by the IRS on your personal taxes.
This method assumes that you’re running a single-member LLC and have elected to be taxed as a sole proprietorship, which is the default for this type of LLC. There are other options, though—we just need to unpack them a little more carefully. Read on to learn other options for paying yourself from your LLC, and why the specific type of LLC you are running is a key consideration.
Why the type of LLC matters
Not all LLCs function the same way when it comes to paying business owners. This is because there are both single-member LLCs and multi-member LLCs, and owner payment must be handled differently in each situation due to taxes. Here’s how you handle paying yourself in each type of LLC.
In this type of LLC, you typically don’t get paid a traditional salary. Instead, you’re compensated with an owner’s draw of your company’s earned profits. As stated above, the easiest way to do this is to write yourself a check from your business bank account and deposit it into your personal account, or move money electronically from your business account into your personal account.
Even though you’ve established an LLC, most single-member LLCs are taxed as sole proprietorships. Since you’re not required to file separate tax returns for single-member LLCs and this type of business is considered a pass-through entity, you are instead taxed on the net income reported on your personal tax returns. If, however, you elect to have your LLC taxed as a corporation, you would then have to pay yourself a salary and treat yourself as an employee of the business.
In this situation, all members in the corporation are seen as equal players in a partnership. The IRS classifies all members as partners, and the company’s profits or losses are distributed equally between named members. Typically, multi-member LLCs have one payment distribution at the end of the fiscal year. If members choose to instead receive distributions throughout the year, these funds must be claimed on their personal tax returns, while the LLC reports how much each member was paid on their business return.
It’s also possible for a multi-member LLC to be treated as an S or C corporation, which would allow all members to be hired by the business and paid a monthly salary—so long as it’s an amount considered “reasonable” by the IRS.
Other ways to pay yourself in an LLC
While the above-outlined payment methods are the most common routes business owners take to get paid through their LLC, there are other options. Here are a few you can consider:
- Independent contractor: Though not ideal for small business owners, you could choose to pay yourself as a contractor, rather than an employee. This allows you to avoid payroll taxes—but you do have to pay the same amount in self-employment taxes each quarter. Since you’d have to tax yourself as an LLC owner and a contractor, it’s probably more work than it’s worth in the long run.
- Reinvest your income back into the business: Rather than pocketing your share of the profit, you can also reinvest that money into your business and build savings there. While this approach is reasonable if you’re not generating huge profits, if you’ve elected to be taxed as an S corporation, be aware that you may exceed the IRS’ “reasonable compensation” parameters. This will likely end up costing you fees and back taxes later on.
Remember: Keep business and personal funds separate
While there are many ways to handle paying yourself from your LLC, it’s important to remember that you will be taxed on the profits you make. Choosing one approach over another in order to minimize or avoid doing so will not do you any favors.
Establish separate accounts for your personal and business finances early on, and do everything in your control to keep those lines clear. One of the most difficult aspects of being a business owner is keeping neat, detailed financial records—but it is an essential aspect of entrepreneurship.
Of course, if you’re deeply invested in your business, you’ll want to pour your money into the growth and expansion of your company. But it’s important that you keep money movement between personal and business accounts to a minimum, and keep it all very clearly documented when it is transferred for owner payment purposes. Business accounts can be audited at any point, and being able to clearly tell the story of your company’s financial history will save you a lot of time and frustration.
Turn to an expert
When it comes to determining how to pay yourself from your LLC, your best bet is always to work with a trusted financial advisor. They will understand the legal and financial matters at stake and help you protect yourself—and your business—from negative consequences.
Ultimately, the choice is up to you—and as your business grows and changes, you may need to adjust your system. Establishing a relationship with a financial advisor early on will make every step of the process run more smoothly.