A lot of our clients come to us for advice as to which entity to choose when starting or expanding their business, whether it be a limited liability company or corporation. While we prefer corporations for greater liability protection, for those that are just starting out, a limited liability company (LLC) may be the way to go due to the flexibility it affords for tax structuring. The Internal Revenue Service (IRS) allows LLC owners to choose how their business will be taxed. As an LLC owner, you can be taxed as a sole proprietorship (if you are the LLC’s sole member), a partnership (if your LLC has two or more members), or a corporation. An LLC also offers owners flexibility in how they pay themselves. How you get paid by your LLC depends on the tax classification you choose. There are various rules for how different business entities are allowed to pay their owners as well as IRS guidelines to consider.
This article provides a general overview of how to pay yourself when you own an LLC. Specific questions about LLC owner payments and which payment structure is best for your company can be directed to a business law attorney.
Your Business Entity Structure
Forming an LLC as opposed to a sole proprietorship or a partnership allows owners to avoid personal liability for business debts and liabilities. However, LLCs can still be taxed like a sole proprietorship or a partnership. LLC owners can also elect to be taxed as a corporation. Here is how it works:
Why does the tax classification of your LLC matter? One important reason is that it affects the ways you are legally allowed to pay yourself as the owner of an LLC.
Let’s look at the payment options for each structure.
Paying Yourself from a Single-Member LLC
Single-member LLC owners pay themselves with what is called an owner’s draw. To make an owner’s draw, you simply write yourself a check from your business account and deposit it in your personal account (or transfer money between accounts online). You can take an owner’s draw at any time, and there is no limit to the number of draws you can take. Keep in mind, though, that an owner’s draw reduces the amount of funds available for business expenses.
Paying Yourself from a Multimember LLC
Depending on whether the multimember LLC is classified as a partnership or a corporation, the owners of a multimember LLC can take an owner’s draw or they can be paid a salary.
If your multimember LLC uses the IRS’s default classification as a partnership, your only option is to take a draw. The IRS does not allow you to be both a partner and an employee in your business.
If your multimember LLC is treated as a corporation for tax purposes, you can be considered an employee. As an employee, you can be paid a salary. This works the same for the LLC member as for any other employee. You set the wage you want to pay yourself and receive a paycheck every pay period. Alternatively, you can hire yourself as an independent contractor.
Other Considerations for Paying Yourself as an LLC Owner
Knowing how to pay yourself from your LLC is just the tip of the iceberg. Here are some other important points to keep in mind:
LLC tax classification and owner payments are complex issues to think about. If you need help balancing what is best for you and what is best for your business while complying with IRS rules, do not hesitate to contact our office to schedule an appointment with us.