Estimated reading time: 5 minutes
LLCs are a popular way to structure your business and protect yourself from personal liability. But you may be asking yourself, how do I pay myself from my LLC?
Well, when it comes to the question of paying yourself, LLC owners must realize that there is no such thing as the best way to pay yourself from your LLC.
This is because there is not just one way to pay yourself, but several options, each with their own pros and cons. So, the best way for you may not be the best way for another LLC owner.
In this blog post, we’ll explore those options, so you can make the best possible decision for your small business.
Table of contents
- Why You Need an LLC
- How to Pay Myself from My LLC: Earn a Salary as an Employee
- How to Pay Myself from My LLC: Receive Distributions
- How to Pay Myself from My LLC: Independent Contractor Status
- How to Pay Yourself: Single-member LLC
- How to Pay Yourself: Multi-member LLC
Why You Need an LLC
Before we jump into the best way to pay yourself from your LLC, let’s quickly recap why you need to form an LLC in the first place.
In our litigious society, incorporating to protect yourself just makes sense. That’s why LLCs are so great. No other structure gives you and your business the liability protection offered by an LLC. When you form an LLC, your personal assets are not at risk for the debts and liability of your business.
It doesn’t take a catastrophic lawsuit to wipe out everything you own. Could you satisfy all your business obligations without tapping into personal reserves or losing personal assets? Probably not. Incorporating takes this burden off your shoulders knowing that your personal assets cannot be targeted in the event of a business lawsuit.
Last but not least, LLCs and corporations are entitled by law to many tax deductions not afforded to individuals. Additionally, the self-employment tax savings alone can amount to thousands of dollars saved every year
We here at Inc Authority specialize in forming LLCs and can get you started in a few simple steps. And our LLC setup service is 100% free!
How to Pay Myself from My LLC: Earn a Salary as an Employee
The simplest answer to “how do I pay myself as an LLC” is to earn a salary as an employee. Business owners actively working in an organization with specific responsibilities can earn a consistent income via a salary. This means your salary comes from the LLC’s operating expenses and is deducted from the profits.
Keep in mind that this salary, as well as any bonuses, can’t be over the top—and must meet industry norms—as the IRS will only allow “reasonable” wages to be deducted. The IRS suggests basing the amount on an individual’s duties, responsibilities, experience, time and comparable salaries to others.
Your LLC should consider you a W-2 employee and withhold income and employment taxes. At the same time, you will need to pay income taxes on your salary.
How to Pay Myself from My LLC: Receive Distributions
If you have an LLC, pay yourself with distributions from the LLC’s profits. These distributions are based on each individual’s investment in the LLC, also referred to as an LLC capital account.
Because some LLC members would rather not wait for year-end profit distributions, they can choose to establish ongoing monthly payments. These payments are considered a draw against the LLC’s year-end profit.
How to Pay Myself from My LLC: Independent Contractor Status
When it comes to the question of how to pay yourself, LLC owners should know that they can choose to work for the LLC under the status of an independent contractor.
Doing this allows individuals to work for the LLC and get paid on a regular basis. Therefore, this is a good option for individuals who want to earn a salary and do not mind filing a W-9 form and paying self-employment taxes.
How to Pay Yourself: Single-member LLC
We already mentioned this, but to make the point clearer, here’s a quick recap: As a single-member LLC, pay yourself by taking money out of your LLCs profits keeping in mind all the industry norms we mentioned.
This process is called an owner’s draw. Simply write yourself a check or transfer the money from your LLC’s bank account to your personal bank account.
How to Pay Yourself: Multi-member LLC
LLCs with more than one member are considered partnerships. Therefore, the members are paid out of their share of the company’s profits.
Members of a multi-member partnerships receive “guaranteed payments.” These resemble salaries but are treated as payments for services. They’re considered “guaranteed” because each member will be paid no matter how well the business is performing.
Here are three things to consider when it comes to getting paid. Is your…
- LLC adequately capitalized?
- Payment method in accordance with the LLC’s Operating Agreement?
- LLC taxed as a partnership or an S-Corporation?
As you can see, the best way to pay yourself from your LLC depends solely on your unique needs and what is best for the LLC as a whole.
That’s why some individuals may opt to receive compensation and a regular income while others choose not to pay themselves and keep the profits in the LLC. There is no right or wrong answer.
Lucky for you, the business experts here at Inc Authority are here to help! We’ll get your LLC setup in minutes. And did we mention that our LLC setup service is 100% free and comes with 9 FREE business management tools.