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Opening a business is a big deal, especially if you open it as an LLC rather than as a sole proprietorship. But when you have an LLC, how are you supposed to pay yourself?
The way you pay yourself from an LLC will vary based on the stake you have in your LLC as well as if there are other members. If you have multiple owners of your LLC and stakeholders, paying yourself can get quite complicated.
Read on to learn more about how you should plan to pay yourself from an LLC.
How to Pay Yourself from an LLC
Depending on the setup of your LLC, paying yourself can be simple, or it can be extremely complicated. Below are all the different LLC setups and how you should plan to pay yourself for each one.
Single Member LLCs
Single member LLCs are the least complicated of all LLC setups, and it is very easy to pay yourself. Under these LLCs, you should be the sole owner as well as the sole employee of your LLC.
Per the IRS, if you are a single-member LLC, then your business income and your personal income are one and the same. This means you can take whatever money you wish from your business account as you please. Now, this doesn’t mean you can get too crazy–as you also need money to run the business.
In order to keep things simple, most LLC owners choose to take money from their business at a certain time of the month, similar to paying themselves a salary, but you don’t have to do this. You can also just transfer money to your personal account whenever you need it, the choice is yours.
Do take note that when you are paying yourself as a single-member LLC, this is what is known as an owner’s draw.
If you have a multi-member LLC, even if it’s just you and a partner, the process of paying yourself becomes increasingly more difficult. This is because the IRS classifies your business income separately from you and any other owners’ of the LLC’s personal income. In these cases, only your personal income, and that of your partners, is taxed.
Both of you (or however many of you there are) must pay yourself using an owner’s draw. While you could use the method of take it whenever you want, as with a single-member LLC, this would likely make your business partners very angry.
Instead, it should be outlined in your operating manual when the owners can draw from the business and how much they can take (typically a percentage up to the percentage of their shares). You should also establish a minimum amount of money that must stay in the bank and what happens.
Many multi-member LLCs find it easiest to set up a salary system that dictates exactly when and how much money they can draw from the business.
The most difficult of all set-ups to pay yourself from is the corporate LLC structure, such as an S Corp or a C Corp. With these business infrastructures in place, you cannot take an owner’s draw, and doing so is illegal.
When you have a corporate LLC, you must set up a salary system and pay yourself as if you were an employee of the business. You will also need to withhold payroll taxes from yourself. This goes for any and all owners of the business. All this documentation must be submitted to the IRS, so it is a good idea to use some sort of payroll software to manage your payroll.
Not only do you need to set up a payroll system, but the one you set up must be considered reasonable for your industry. This means you cannot just pay yourself $1 a month.
In addition to taking money from your business via salary, you can also have yourself paid out in distributions and dividends, which are cut from the company’s profits. While these dividends are still subject to taxes, they don’t need to have taxes withheld, which is why many people prefer to take a smaller salary and then pay themselves more in dividends. This is fine as long as the minimum salary is met.
This means you cannot just pay yourself $1 a month and take out all dividends to avoid taxes. Be sure to research what a reasonable salary is for your profession before setting up a payroll or dividend-paying system.
What is an Owner’s Draw?
If you have a single or multi-member LLC, you can pay yourself directly from the company funds via what is known as an owner’s draw. While this might sound fancy, it really isn’t. In fact, an owner's draw can be as simple as a direct deposit into your personal bank account.
You can also write yourself a check or set up a payroll system if you really want to. No matter what you decide, you must create a paper trail that you can submit to the IRS at the end of the year. You can’t just spend the cash of the business on a whim.
Additionally, you should not purchase personal things with your company bank account or card because this can make it difficult to keep the costs of the business separate from personal purchases. Especially if you are keeping a balance sheet of all the assets, the business has on hand.
Are Owner’s Draws Taxed?
While you don’t need to pay tax on the owner's draws as you take them, you will owe taxes further down the line, so ensure you keep track of how much you take and when.
These draws will be taxes based on your income tax bracket. That means that if you are in a multi-member LLC, you may pay different taxes on your owner’s draw than your partner will.
There isn’t a good way to estimate how many taxes you will owe on your owner’s draw because the US tax code is so complicated. But you should plan to put aside at least a fifth of all the owner’s draws that you make, so there are no surprises come tax season.
If you aren’t good at saving money, you can arrange to pay estimated taxes quarterly in order to lower the amount you owe. You’ll need to fill out form 1040-ES for this.
How Are Corporate LLCs Taxed?
Remember that when you pay yourself from a corporate LLC that the payment will come to your bank account pre-taxed. This means you don’t need to worry about setting aside money for taxes further down the road, as they are taken out when you are paid.
But you do need to plan to file a business tax return. Your business will be taxed on top of what is already taken out of your personal salary. This can get quite complicated and quite expensive if your corporation isn’t bringing in a lot of profits.
If you have a corporation LLC, it can be a good idea to seek professional help when it comes time to file your taxes. This way, you won’t leave anything up to chance and will submit correct returns to the IRS.
Is It Beneficial to Leave Money in Your Business?
It is always a good idea to leave a large portion of money in your LLC. This is because unexpected business expenses can arise, and if you don’t have the money to cover them, your business could go under unexpectedly.
Additionally, this will give your business some funds in case you want to purchase some nice equipment down the road or upgrade equipment you already have on hand.
Do remember, however, that you are still taxed on your business profits whether or not you move them from the business. So while saving money in your business can be personally beneficial, there aren’t really any tax benefits from it.
Do You Need a Business Bank Account for an LLC?
No matter what type of business you have, it is always recommended to have a business bank account. This will help you to keep your business expenses and personal expenses separate. It will also make it easy to track the assets of the business. If you have a multi-member LLC, then a business bank account is a must.
It is recommended to always accept payments for your business in your business bank account and then transfer money to your personal account for owner’s draws. This is very effective at keeping the funds separate and making it much easier on your accountant come tax season.
Of course, if it is just you, then you don’t have to have a business bank account, just be prepared to explain to your accountant which of your purchases are for your business and which are for personal use!
Reference Legal Explanations
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"How to Pay Yourself from an LLC". Legal Explanations. Accessed on September 30, 2023. https://legal-explanations.com/blog/how-to-pay-yourself-from-an-llc/.
"How to Pay Yourself from an LLC". Legal Explanations, https://legal-explanations.com/blog/how-to-pay-yourself-from-an-llc/. Accessed 30 September, 2023
How to Pay Yourself from an LLC. Legal Explanations. Retrieved from https://legal-explanations.com/blog/how-to-pay-yourself-from-an-llc/.