You may be curious about how your company gets paid if it is a limited liability business. This article will explain what an LLC is, and how to pay yourself within IRS guidelines.
Business owners often ask the question, “How can I pay myself out of my business?”. If you are a sole proprietor, the answer to this question is simple. However, if your business is set up as a small LLC, there are a variety of options depending on whether it is a single-member LLC, or a multimember LLC.
Overview: What’s an LLC?
An LLC is a good option if you are looking to start your own business. An LLC, unlike other corporate structures, is simple to set up and protects your personal assets in the event of a lawsuit.
Before you form any business, it is highly recommended to consult an attorney or CPA. While LLCs can be more complex than corporations, an attorney and CPA can help you navigate the process to find the best structure for your business.
An LLC can only be established by one person. However, it can also have multiple members. An LLC has many benefits, including the following.
- Personal liability limited: If you are sole proprietor, there is no protection from being personally liable in the event of business debts or other legal issues. Your personal assets, such as your home and bank accounts, will be protected if your LLC is formed. Although there are exceptions, most LLCs will provide better protection for your assets than sole proprietorships.
- No corporate taxes: This is a huge deal. An LLC doesn’t need to file a corporate return. Most LLC members report their profit and loss on their individual tax returns. This allows you to avoid double taxation.
- You can be the sole owner of an LLC in most states: This means that you can run your business without having to have partners or a board. Check with your state to learn more about how an LLC can be started.
- Credibility: Having an LLC can increase your credibility among customers, vendors, financial institutions, and other stakeholders.
- Less paperwork: An LLC does not require a corporation to hold annual meetings, file annual reports, or pay a fee to maintain its corporate status.
You can set up your business status if you are using accounting software. Information about the Self-Employment Contributions Act (or SECA tax), which is required for sole proprietors, LLCs, and partnerships, will also be included.
How to make money from your LLC
You have many options to pay yourself out of your LLC. However, the options may vary depending on whether your LLC is a single-member or multi-member LLC. If you are solely involved in the operation of your LLC, it will be treated as a sole proprietorship and a multi-member LLC as a partnership or corporation.
LLC with one member
You don’t get a salary if you are the sole member of a single-member LLC. Instead, you will draw from any profits the company makes. This is easiest if you write a check to yourself from your business bank account and deposit it in your personal account.
Another option is to transfer funds directly from your bank account to your account. Whatever method you choose to use, make sure to keep all details for tax purposes.
Taxes: Since you don’t need to file separate tax returns for an LLC with one member, your LLC’s net income at the end will be subject to tax. An LLC is a pass through entity and any income it earns will be reported on your personal taxes.
You won’t be taxed for any distributions that you make throughout the year, however, since you already pay income tax.
There is an option to tax your LLC like a corporation. This will require you to file a separate tax return and allow you to be paid as an employee of the corporation.
Multi-member LLCs are a marriage between a partnership or a corporation. Therefore, the rules for payment of yourself are different than those of single-member LLCs. An LLC that has multiple members is automatically classified by the IRS as an LLC partnership. Profits and losses are transferred from the LLC to the LLC members.
Many times, LLC members are paid one time at the end of each fiscal year. Each LLC member receives their share of the profits in one lump sum.
You can also draw monthly from the profits. Each member of the LLC must pay taxes on all distributions throughout the year. The LLC files a business return with IRS detailing the amount each member was paid.
If your multi-member LLC has an S or C corporation as members, then you and the other LLC members must be employed and paid a salary. The IRS will consider salaries paid “reasonable” if they are paid.
What exactly is an LLC?
An LLC is a company with limited liability. An LLC is a limited liability company that protects owners from personal liability. It is a popular alternative for sole proprietorships. If you own a small restaurant and someone falls while going to the bathroom, they can legally sue you and your company for both your personal and business assets.
An LLC protects your personal assets (including your home) from legal liabilities that could arise from lawsuits or debt.
Should I pay myself a salary?
You can simply draw or distribute a single-member LLC. You don’t have to pay yourself an employee. You can pay yourself if you are a member of a multi-member LLC. This is as long as the LLC is a partnership. You and the other LLC members must be paid as employees if it is an S-corporation or C-corporation.
Is my income subject to being double-taxed?
No. No. If you are a C-corporation or S-corporation, however, your income will be subject to regular income tax as well as corporate taxes. Before deciding on the best business structure for you, it is a good idea to consult a CPA or attorney.
It is much easier than you might think to pay yourself out of your LLC.
It is difficult enough to run a small business. It’s not worth creating additional work for yourself. It’s simple to pay yourself directly if you start an LLC.
You can take a draw regularly from a single-member LLC or a multimember LLC that operates as a partnership. Either write a check to yourself or transfer funds between your personal and business accounts.
Every business is different, so make sure you consult your attorney or CPA before you decide to create an LLC.
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: email@example.com