Paying yourself as the owner of an LLC is more challenging than paying yourself as a sole proprietor.
Several factors are going to influence how you pay yourself. For example, there are tax implications that you should be aware of and it will also depend on whether it’s a single or multi-member LLC.
An LLC is a Limited Liability Company that can be formed by anyone who is planning on starting a business or individuals who currently operate a business as the sole proprietor.
Owners of an LLC are not personally liable for any of the company’s debts or liabilities. For example, if your business is sued for any reason, your personal assets are going to be protected.
A popular legal entity, an LLC can be used to run any business regardless of its size. Though it may be started by one individual, it can have several members.
The structure of an LLC can differ between states, though owners are typically referred to as members. When compared to a corporation, an LLC is cheaper to form and easier to run as it offers more flexibility.
A single-member LLC is controlled by one member and is its own legal entity. Instead of earning a salary, as the owner, you will receive an owner’s draw from the profits. An owner’s draw is when the owner takes funds out of the business for personal use.
It is fairly easy to do. First, you will need to write a check that states the amount that you are going to be withdrawing from the business account to deposit into your account. You will then need to keep a record of this draw.
Alternatively, you may wish to transfer the funds into your personal account from your business account rather than write a check.
It is important to make a note of these checks or transfers for tax reasons. At the end of the tax year, your LLC will be taxed on its net income. Moreover, if preferred, you can have your LLC taxed in the same way as a corporation.
This involves paying yourself as though you were an employee and filing a separate tax return.
The IRS will tax the earnings of your company for the year. For example, if your business earned $25,000 you would pay tax for this sum.
If you withdrew an owner’s draw amounting to $10,000 as it’s already been taxed, it will not be taxed a second time. However, a self-employment tax will still need to be paid on your draw and this rate currently sits at 15.3%.
As implied, a multi-member LLC is a company that has two or members who share control. Before deciding on the best tax structure for the business, members must agree on how the profits are going to be shared and distributed.
A structure of this kind combines elements of a partnership and corporation. Like a partnership, a multi-member LLC offers flexibility, and just like a corporation, it provides the owners with limited liability.
Typically, the IRS identifies the majority of multi-member LLCs as partnerships. As such, all losses and profits are passed to members of the LLC from the business. Earnings are typically paid as the tax year concludes and profits are paid in one sum.
Alternatively, members of a partnership LLC may wish to withdraw their earnings as a draw, similar to a single-member LLC with the noticeable difference that this is a ‘‘pass-through’’ entity that isn’t taxed.
Instead, all members pay a share of the total tax amount on the earnings of the partnership. This tax is paid in full regardless of whether or not it is all withdrawn.
The procedure remains the same as when you withdraw the earnings from a single-member LLC. Although you will need to pay self-employment taxes, once it is already charged income tax, it will not be charged again.
At the end of the year, a business return is filed by the LLC with the IRS detailing how much each member of the company has earned.
If you are a member of a corporate LLC, you will need to be hired as an employee and paid a salary from the business, regardless of whether the company is an S corporation or a C corporation.
A percentage of this income may be taken in the form of a dividend. It is also worth noting that a C corporation LLC typically tends to be taxed double the amount.
Running a business can be stressful without the added stress of figuring out how you or other members of your LLC are going to get paid.
Paying yourself as an owner or member of an LLC is much easier than many people may think as you can either transfer the amount or write a check rather than set up a payroll.