Ever wondered how Limited Liability Company (LLC) owners pay themselves? Starting your own business comes with a mountain of questions, including deciding how your hard-earned money reaches your pocket. In this article, we'll look at how you can get paid as an owner of one of the over 21 million LLCs in the US.¹
We'll also talk about Wise Business, a convenient, cost-effective international account option (with a debit card) that simplifies your transactions, both globally and domestically.
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How to take money out of LLC without paying taxes
The primary way to take money out of an LLC without paying taxes is through distributions (dividends). While operating your business as an LLC, profits are generally not taxed at the corporate level. Instead, they “pass through” to the owners, who report their share of profits on their individual tax returns. Dividend distributions are considered a return on investment and not salaries, making them exempt from employment taxes like social security and Medicare.
The proportion of these tax-free distributions will depend on your operating agreement and ownership percentage, but managing these payments properly will help you avoid issues with the IRS. As per the IRS guidelines, members of an LLC must make sure they're not disguising their LLC salaries as dividend distributions, or they may face penalties.
Taking money out of an LLC tax-efficiently could be easier than you think. Here’s how the process typically works:
1. Determine your company's profit: Calculate your LLC's net income after deducting operating expenses, payroll, and taxes to find the profit available for distribution.
2. Declaration of dividends: As an LLC owner, you have the option to allocate a portion of your company's profits for dividends. The decision should be documented in formal meeting minutes or a resolution.
3. Distribute dividends: Once the dividend amount is finalized, distribute it to the LLC members (owners) according to their respective membership interests or as agreed upon in the operating agreement.
4. Report dividends on personal tax return: When you receive dividends, you'll need to report them on your personal tax return. Dividends are typically taxed at a lower rate than wages, as they're subject to the capital gains tax rate instead of the ordinary income tax rate.
5. Enjoy your tax-efficient income: By choosing dividends as a form of compensation, you get to benefit from lower taxation compared to regular income, like salaries or bonuses.
Can LLC members be on payroll?
LLC members, who are considered owners of the business, can’t be on the regular payroll like regular employees. Instead, they receive their income in two main ways: by getting a share of the company's profits (known as taking a "draw") or by receiving a guaranteed payment for the services they provide to the LLC.
Member draws: LLC members can take periodic "draws" from the company's profits. These draws represent each member's share of the earnings based on their ownership percentage. You’ll need to keep accurate records of these draws, as they have tax implications.
Guaranteed payments: Alternatively, an LLC can agree to provide members with guaranteed payments for their services, regardless of the company's profit or loss. These payments function similarly to a salary, and members are taxed on this income as self-employed individuals. But unlike a salary, the members still aren't considered regular employees, and guaranteed payments don't include benefits like employee payroll taxes.
How do multiple owners of an LLC get paid?
When an LLC has multiple owners or members, getting paid is a slightly different process. Typically, each member will receive a share of the company's profits based on their agreed ownership percentage. The business won’t directly pay an LLC salary or wage to the members; instead, they'll receive "member distributions."
These distributions represent each member's share of company earnings, and all members should have a clear understanding and written agreement on ownership percentages and how profit distributions will be handled.
Let's delve deeper into how multiple owners in an LLC receive their payments:
- Ownership percentages: In an LLC with multiple owners, the members agree on specific ownership percentages. These percentages determine the amount each member is entitled to receive when the company distributes profits. The allocation is usually based on the initial capital investment, expertise, or the members' involvement in running the business.
- Member distributions: Instead of receiving salaries or wages like regular employees, as mentioned, LLC owners get paid through member distributions, which are divided according to their agreed ownership percentages.
- Distribution frequency: Members can decide on the frequency of these distributions, which can be monthly, quarterly, or annually. But companies have to always make sure they have sufficient cash flow and working capital to cover their financial obligations before releasing them.
- Tax implications: While members don't pay payroll taxes on their distributions, they have to report this income on their personal tax returns as self-employment income. That means each member will have to pay self-employment taxes (Social Security and Medicare) on their share of the company's earnings, even if they don't actively participate in managing the business.
Balancing draws and guaranteed payments is crucial for both the smooth operation of your LLC and your personal tax obligations. Make sure you track and document all payments carefully, and when in doubt, consult a professional to help you make the smartest choices for your business. Good financial practices can make all the difference in your business success and long-term growth.
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FAQ: How does the owner of an LLC get paid?
Still need answers? Let's dive into our FAQ section, where we'll tackle a few common questions you might have.
Who can be members of an LLC?
An LLC has a lot of flexibility when it comes to choosing members. In fact, just about anyone can be a member – from individuals, corporations, and even other LLCs. There's no specific limit to the number of members an LLC can have. LLCs can be single-member entities or include multiple members with diverse ownership stakes.
Members don't even have to be residents or citizens of the United States. This means that foreigners can also be part of an LLC, making it an attractive option for many international entrepreneurs looking to establish a business presence in the US.
How to make money with an LLC
Making money with an LLC is all about leveraging the benefits and flexibility this structure offers to drive profits for your business. Having an LLC in place can help you save money on taxes, protect your personal assets, and create a more professional image for your company, all of which contribute to its growth and success.
To really capitalize on your LLC status, find a niche or demand in the market, develop a unique product or service, and create a solid business plan. Then, focus on establishing a strong online presence, boosting visibility, building a loyal customer base, and generating revenue. As your business starts to rake in profits, you'll be reaping the rewards of your hard work and enjoying the financial advantages that come with running an LLC.
Wise Business Account for International Businesses
The Wise Business Account is an excellent option for LLCs and sole proprietors looking to simplify their financial management.
LLCs can both receive and send payments efficiently with Wise Business, which is used by over 300k businesses every quarter.
LLCs can pay a one-time fee to get local account details in 9+ currencies. This means you can avoid any international transfer charges or high conversion fees.
- Get paid by clients
- Use your account for ecommerce payments: Amazon, eBay, Alibaba, Etsy
- Use your account to pay suppliers or your team abroad
What makes Wise Business different? Wise has become a mainstay of the international payments industry through eliminating fees and offering the mid-market rate on currency transfers.
But it's not just international business that benefits. Wise Business Account is perfect for domestic transactions too, making it an all-around solution for managing your company's finances.
Wise customers can also access a debit card (for a one-time fee), batch payments, accounting integrations, budgeting tools and account permissions, and more.
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Sources:
- https://www.flblaw.com/is-it-time-to-think-about-an-llc-for-your-business/
- https://www.trustpilot.com/review/wise.com
*Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information. This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional. We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
