If your business is a limited liability company, you may be wondering exactly how you get paid. We’ll explain what an LLC is and how you can pay yourself while staying within IRS guidelines.
One of the most frequent questions asked by business owners is, “How do I pay myself from my business?” If you’re a sole proprietor, the answer is easy, but if you set up your operation as a small business LLC, you’ll have a few options to choose from depending on whether you’re a single-member LLC or a multi-member LLC.
Overview: What is an LLC?
If you’re ready to start a business, you may want to consider becoming an LLC. Unlike other corporate structures, an LLC is easy to start, and it also protects your personal assets in case of a lawsuit.
It’s highly recommended that you consult with an attorney or CPA before forming any type of business. Although LLCs are fairly simple compared to corporations, an attorney or CPA can guide you through the entire process to determine which structure suits your business best.
An LLC can be started with only one person, but it can have multiple members as well. There are numerous advantages to starting an LLC, including the following.
- Limited personal liability: When you’re a sole proprietor, nothing protects you from being personally liable for business debts or legal issues. However, if your business is an LLC, your personal assets -- such as your home or personal bank account -- will be protected. There are exceptions to this rule, but in most cases, an LLC will better protect your assets than a sole proprietorship.
- No corporate taxes: This one is a biggie. If you’re an LLC, you don’t have to file a corporate tax return since in most cases members of an LLC report profit and loss on their individual tax returns. This lets you avoid duplicate taxation.
- Sole ownership possible: Most states allow you to be a sole-owner LLC, meaning you can continue to run your business without the need for partners or a board of directors. Be sure to check with your state for its guidelines on starting an LLC.
- Credibility: Becoming an LLC may increase your credibility with your customers, vendors, and financial institutions.
- Less paperwork: Although there is some paperwork involved in the creation of an LLC, it’s significantly less than that required for a corporation. For example, a corporation must hold annual meetings, file annual reports, and pay a fee to retain corporation status, none of which is required for an LLC.
If you’re using accounting software, you can create your business status during the setup process. Then information related to the Self-Employment Contributions Act, or SECA tax, which is a required tax for sole proprietors, LLCs, and partnerships, will be included.
How to pay yourself from your LLC
There are numerous options for paying yourself from your LLC, although the options can change depending on whether you’re a single-member LLC or a multi-member LLC. For example, if you operate solely, your LLC will be taxed as a sole proprietorship, while a multi-member LLC will be taxed as a partnership or corporation.
Single-member LLC
If you own a single-member LLC, you don’t get paid a salary. Instead, you’ll take an owner’s draw from the profits earned by the company. The easiest way to do this is to write yourself a check from the business bank account and deposit it into your personal account.
The other option is to transfer funds from your business bank account into your account. Whichever method you choose, be sure to save all of the necessary details for tax purposes.
As for taxes, because you’re not required to file a separate tax return for a single-member LLC, you’ll be taxed on the net income earned by your LLC at the end of the year. Because an LLC in most cases is considered a pass-through entity, any net income it earned will be reported on your personal tax return.
However, because you’re already taxed on the net income, you will not be taxed on any distributions you take throughout the year.
You do have the option to have your LLC taxed as if it were a corporation, which will require a separate tax return, and for you to pay yourself as an employee of the corporation.
Multi-member LLC
Because a multi-member LLC is a marriage between a partnership and a corporation, the rules for paying yourself are different from those of a single-member LLC. The IRS automatically classifies a multi-member LLC as an LLC partnership, and profits and losses are passed from the business to each member in the LLC.
In many cases, members of a multi-member LLC are paid once at the end of the fiscal year, and each of the LLC members receive their portion of the profits in one lump sum.
There is also the option to draw from profits each month. Each member of the LLC is required to pay taxes on any distributions received throughout the year on their personal tax return. The LLC then files a business return with the IRS stating the amount that each member of the LLC was paid.
However, if your multi-member LLC is an S corporation or a C corporation, you and all of the other LLC members will need to be hired as employees and paid a business salary. If salaries are paid, they must be considered “reasonable” in the eyes of the IRS.
Paying yourself from your LLC is easier than you think
Running a successful small business is hard enough. You don’t want to create additional work for yourself in the process. Luckily, if you decide to start an LLC, it’s easy to pay yourself directly without the need to process payroll.
If you have a single-member LLC, or a multi-member LLC operating as a partnership, you can take draws regularly by either writing a check to yourself from the LLC or simply transferring funds between your business account and your personal account.
Because all businesses are different, be sure to check with your attorney or CPA to see if an LLC is a good choice for your business.
FAQs
An LLC is a limited liability company. It’s a popular alternative to a sole proprietorship since it’s designed to protect owners from personal liability. For example, if you operate a small restaurant as a sole proprietorship and someone slips on their way to the restroom and breaks their leg, they can legally come after both your company assets and your personal assets.
An LLC protects your personal assets, including your home and personal bank account, from any legal liabilities that may arise from debt or lawsuits.
If you’re a single-member LLC, you simply take a draw or distribution. There’s no need to pay yourself as an employee. If you’re a part of a multi-member LLC, you can also pay yourself by taking a draw as long as your LLC is a partnership. If it’s an S corporation or C corporation, you and other LLC members will have to be paid as employees.
No. If you’re a single-member LLC, or an LLC that’s a partnership, your small business is only taxed once on the income received from the LLC. However, if you’re a C corporation or S corporation, you’ll have to pay corporate taxes as well as regular income taxes on your earnings. It’s best to talk to an attorney or CPA before deciding which business structure is best for you.
