When you operate a limited liability company (LLC), paying yourself or earning money from it is a little more challenging than a sole proprietorship. The procedure of taking cash or paying yourself from your limited liability company will depend on your answer to this question – is it a multi-member or a single-member LLC?
If you hold any position as an employee of your small business, you must remember that the IRS requires you to compensate yourself reasonably. Do you want to discover more about how you can pay yourself from an LLC and ensure your earnings meet the IRS guidelines when filing your tax return? Keep reading! The following sections have everything you need to know.
How to be an employee of your own company
Can you be a worker in your own company? This is a vital question that most business owners ask themselves. The ability to be a worker of your company depends on several factors, including business type and structure.
When your business is under a sole proprietorship or a partnership umbrella, you’re allowed to be on the payroll as an employee. If this is the case, you can pay yourself from the income of the business; however, it won’t be a tax-deductible income. Many ways to pay yourself exist, but the easiest one is to take a distribution and make a projected payment.
What is an LLC?
A limited liability company (LLC) is an enhanced business structure that blends sole proprietorships’ and corporations’ most attractive features. Similar to corporations, all LLC types offer limited personal liability protection. With an LLC, all losses and profits are reported on the owner’s income tax return instead of a company tax return, and yearly meetings aren’t required.
While all LLC owners are known as members, specific laws differ from one state to another. Your business can have as many members as you like, and the main types of LLCs include corporate LLCs, multi-member LLCs, and single-member LLCs. A single-member LLC has one member, while a multi-member LLC features a minimum of two members. On the other hand, a corporate LLC decides to be taxed as a corporation.
Paying yourself as a single-member LLC owner
The most popular way to pay yourself as the owner of a single-member LLC is by creating an owner’s draw. With this method, you draw money from your LLC earnings anytime you see appropriate. That means you don’t have a recurring monthly income. The owner’s draw method offers much-needed flexibility as it enables you to adjust the amount of cash you receive depending on your business’s progress. In this case, your business’s profits and your income are the same thing.
Creating your owner’s draw is a straightforward process, which includes writing yourself a check from the business account and recording the amount on the books as your owner’s equity account reduction. The salary method is another option to pay yourself. That means you’re regularly paid a predetermined amount of money as your compensation, just like other employees. How involved you’re in running the business and the company structure determine an ideal method for paying yourself.
What is the owner’s draw, and how does it work?
An owner’s draw is a method for an LLC owner to withdraw funds from the business account for personal use. LLC owners use this method to compensate themselves instead of taking salaries regularly. Sometimes, an owner’s draw can be taken on top of a regular salary from the LLC.
When you operate a partnership or a sole proprietorship, you aren’t answerable to stakeholders. That means you make important decisions on your own or with your partner and decide the amount to draw. The decisions you make include the amount to withdraw from the business account and when to do it.
As the LLC owner, you can take the distributions and extend to the business profits for personal gains – anytime you feel it’s necessary. As the owner’s draw method allows you to withdraw funds anytime and any amount you need, it’s vital to keep in mind that taking huge amounts can result in the flow of money problems in the future. Also, it’s vital to keep correct records and keep track of the amount you withdraw from your business yearly.
Paying yourself as a multi-member LLC owner
Paying yourself from a multi-member LLC depends on whether the company is a corporation or a partnership. The IRS considers each multi-member LLC a partnership. When it comes to paying yourself, you receive earnings through profit distributions from the multi-member limited liability company yearly.
Every member of the LLC owns a certain percentage, popularly known as the capital account. The percentage is determined based on the contribution of each member towards the startup cost and whether he or she works for the company. Yearly profit distributions depend on each member’s percentage. For instance, if the company makes a profit of $100,000, and you own 60% while other members share the remaining 40%, you’ll receive $60,000. Other members will share the remaining $40,000.
Paying yourself from an LLC taxed as S Corp
Both multi and single-member LLCs can choose to be taxed as S Corps. They just need to file the appropriate paperwork with the IRS. A lawfully operating corporate LLC must have a payroll, and any member offering a service(s) to the company needs to be compensated as a worker.
Each member can also take a certain percentage of the business income in terms of distributions or dividends. Members of limited liability companies receive distributions based on their membership interest proportion. S Corp members can make reasonable at-will withdrawals from the business funds, just like owner’s draws.
But if the LLC has several members, distributions shouldn’t be disproportionate to every member’s interest. Otherwise, this violates the regulation that S Corps can only feature a single stock class since uneven distributions have an effect on multiple stock types.
How much to pay yourself from an LLC
As an LLC owner, you might think that you don’t need to know the exact amount you pay yourself – and that anything extra goes directly into your pocket. You need to make some considerations when it comes to the amount you pay yourself based on the payment method you choose.
If you decide to go with the owner’s draw option, especially if you’re a single-member LLC owner, you can withdraw any amount. After all, the business and the profits are all yours. As you withdraw the money, remember you have taxes to pay and day-to-day operations to take care of.
You can also calculate a reasonable compensation. The calculation process is simple, and you’ll receive your salaries via a mix of paychecks and dividends. It doesn’t matter whether you receive your payment in distributions or dividends; IRS requires you to pay yourself a reasonable salary.
What is the most tax-efficient way to pay yourself from an LLC?
The most tax-efficient way to pay yourself from an LLC is a combination of dividends and salary (through PAYE). Extra efficiencies can be gained using owner’s expenses where necessary and availing oneself of tax exemptions. The key lies in maximizing tax-free options and personal allowances while reducing corporate tax and lawfully avoiding other business liabilities where possible.
Remember, the most tax-efficient way for an LLC owner varies depending on tax rates of the year and specific circumstances. The basic approaches include salary, dividend payments, director’s loans, expenses, and pensions.
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