How To Pay Yourself From an LLC
Small-business owners often think an LLC is an excellent way to form a business because it represents an elegant way to divide personal assets from their business entity. A Limited Liability Company – or LLC – means that a business owner cannot be personally responsible for their company’s debts. Flexibility with profit and tax distribution is another vital reason business owners choose this business solution.
If you’re wondering how your salary works in this case, our guide will show you the options for getting paid, as well as your responsibilities to the IRS.
How To Pay Yourself in an LLC
The answer depends on how you choose to structure your business. An LLC can be owned by one person (a single-member LLC) or co-owned (a multi-member LLC). IRS rules consider an LLC to be a sole proprietorship when there’s just one member and a partnership when there are two or more LLC members. You can also choose to structure your LLC as a corporation. In this scenario, you’ll be an employee in your company and get a regular salary.
The three different solutions offer different profit distribution and tax requirements.
How To Pay Yourself in a Single-Member LLC
An LLC where you are the only member is a single-owner LLC. The good thing is, as the sole proprietor of your business, the only payments you need to think about are your own. On the other hand, you don’t get a salary or any other type of standard compensation. Instead, as a business owner, you can access the funds on your LLC account and transfer the amount you need to your personal account. This type of compensation model is known as “owner draw.”
Unlike a fixed salary, the owners’ draw from an LLC account is a flexible method, as there is no predetermined draw limit or strict payment schedule. You can simply write a check or transfer money from your business account to your personal account at any time you want.
How To Pay Taxes
The IRS regulates tax payment for all LLCs, including single-member ones. An LLC with just one member is considered a sole proprietorship and a disregarded entity, which means you don’t need a separate tax return for it. Instead, the LLC–payroll owner reports LLC income as part of their personal income, and that’s what gets taxed. You’ll use Schedule C to report your business earnings and losses on an annual level and submit it with your Form 1040.
What Does It Mean for You?
First off, you’ll need to pay taxes for everything the company earns, regardless of funds drawn. Secondly, since you’re considered the LLC’s sole proprietor, you’ll need to report self-employment taxes (Social Security and Medicare) to the IRS. The main downside of using the owner draw payment method is the extra skills you need to do your taxes.
How To Pay Yourself in a Multi-Member LLC
A multi-member LLC is a business entity with two or more members, and the IRS will view it as a partnership. You can also choose your LLC to be treated as a corporation by the IRS, in which case, you’ll be an employee and get a salary. We’ll discuss this option later.
Much like in a single-member LLC, each owner of a multi-member LLC can draw money from the company account. There’s one capital or a general-ledger account that shows business expenses, earnings, the capital contributed by each member, etc. And if you’re wondering how much do multiple owners of an LLC get paid, it depends on the partners themselves. Together, you must decide how much each of you should be paid and how the payments will be transferred.
There’s a document every aspiring proprietor should have when forming an LLC with friends or business partners. It’s called an operating agreement and shows each member’s ownership percentage, rights, and how much of the business earnings they get. The document can also include information on how to pay LLC members, especially when the company doesn’t make much – or any – money. Paying yourself with a partnership LLC can quickly become a bone of contention, so make sure to agree with the other members on stable payments even when your company doesn’t make profits.
How Does Paying Taxes as an LLC With Multiple Members Work?
If your LLC is classified as a partnership, each partner must pay individual taxes directly to the IRS. You calculate your tax returns based on each member’s ownership percentage. For LLC income–tax purposes, you need to file the IRS Form 1065 to report your business profits and expenses. After that, you and the other LLC members on payroll must show your share of a partnership income on Schedule K-1.
It’s also important to mention that the members of an LLC must pay full taxes on their share of the earnings, no matter how much they draw from the joint account for compensation. For example, if your share in an LLC is 50% and you take only a part of that as an owner draw or even nothing at all, you’ll still pay taxes on 50% of the business earnings.
LLC Guaranteed Payments vs. Owner Draw
With owner draw, the proprietors can get funds from the LLC’s business account as needed or set up recurring payments. It’s a good solution, especially if you’re the only owner of your business. However, you need to be careful to leave enough money in the business account for your company to operate smoothly.
On the other hand, you can use guaranteed payments. As the name suggests, they are a guaranteed amount that each co-owner receives, regardless of how much their business is currently earning. LLC member compensation should be strictly outlined in the operating agreement, which is why it’s so important to pay special attention when creating this document with your partners. Although an LLC looks like an easy business entity to manage, its owners should be familiar with the fact that managing an LLC comes with certain rules. For example, if you decided to set up a guaranteed LLC payment for each member, you need to do that before you officially form your LLC.
Run an LLC – Pay Yourself From a Corporate Account
Another road you can take when you start an LLC is to structure it as a corporation. You and the other owners will be considered employees, and instead of owners draw, you’ll get monthly salaries.
Each member must report their earnings from the LLC as part of their personal income to the IRS. In addition, the company itself has to pay taxes. You’ll need to file different tax forms and schedules, depending on whether your LLC is incorporated as a C-Corp or S-Corp.
How do I pay myself from my LLC?
It depends on how many people own the company. If you are a single proprietor, you can withdraw money from your business account when needed. This payment method is called owner draw, and it’s also used in multi-member LLCs. If that doesn’t sound good, you can agree with your fellow owners to have guaranteed payments. However, if you choose this option, you have to set up the payment method before forming your LLC and outline it in the company’s operating agreement. Otherwise, paying yourself from the LLC account will be possible only via owner draw. You can also incorporate your LLC, thus becoming an employee and getting a fixed monthly salary.
Can the owner of an LLC be paid as an employee?
Yes, if you decide to structure your business as a corporation – you and the other members will be company employees with monthly salaries. This also means that your business will be taxed differently by the IRS.
Can an LLC have two owners?
Yes, an LLC with two or more owners is considered a multi-member LLC. If you’re wondering how to pay yourself in an LLC that has multiple owners, read our guide to find out.
Does an LLC pay self-employment tax?
One of the main downsides of registering a business as an LLC is that you’ll need to pay self-employment taxes. Your business is taxed by the IRS as a sole proprietorship, meaning you are not technically employed and have no salary. As such, you need to report self-employment taxes (Social Security and Medicare) to the IRS.