Paying Yourself through Your LLC

Understanding the structure of an LLC

1st Advantage

An LLC is that it separates personal and business assets, protecting your personal assets from business liabilities.

This means that if your LLC faces legal action or bankruptcy, your personal assets, such as your home or personal savings, are generally shielded from creditors.

2nd Advantage

Another benefit is the flexibility it offers in terms of taxation. By default, an LLC is considered a pass-through entity, meaning that the profits and losses of the business pass through to the members' personal tax returns.

This avoids the issue of double taxation faced by corporations. 

Advantages of paying yourself through your LLC

Paying yourself through your LLC allows you to take advantage of the legal and tax benefits that come with this business structure such as:

Limited Liability Protection

By paying yourself through your LLC, you maintain the separation between personal and business assets, ensuring that your personal assets are protected in the event of legal action or financial difficulties.

Tax Flexibility

As an LLC owner, you have the flexibility to choose how you want to be taxed. By default, LLCs are pass-through entities, meaning that the profits and losses of the business flow through to the members' personal tax returns.

Simplicity 

It eliminates the need for complex payroll systems or expensive administrative processes. Instead, you can set up a pay system that suits your needs.

Deciding how much to pay yourself

When deciding how much to pay yourself, you want to consider the financial health of your LLC, your personal needs and industry standards.

Some choose to "profit first" and others prefer to reinvestthe majority of funds and revenue earned back into the business.

This is an individual decision based on both your business and personal goals. Remember, this can always be adjusted as your business grows.

Setting up a salary or distribution system

As an LLC owner, you have the flexibility to choose how you want to get paid through either a salary or distributions. 

Salary

Paying yourself a salary can offer stability and predictability. It allows you to set a fixed amount that you'll receive on a regular basis, similar to a traditional employee.

This option may be best when your business is generating consistent, reliable revenue. 

With this option, your salary is subject to payroll taxes, including Social Security and Medicare taxes.

Distributions aka "owner's draw"

LLC owners can also take an "owners draw."

This is a withdrawal of the LLC's profits that is distributed to its members.

An an LLC owner, taking funds from you LLC as needed is often the preferred choice when either just starting your business or if your business revenue is unpredictable or inconsistent.

Tax considerations for paying yourself through your LLC

Paying yourself through your LLC has tax implications that need to be carefully managed. So keep in mind the following:

Self-Employment Taxes

As an LLC owner, you're considered self-employed for tax purposes. This means you're responsible for paying self-employment taxes, which include Social Security and Medicare taxes.

If you pay yourself a salary, these taxes are usually withheld from your paycheck.

But if you take an owner's draw, you'll need to set aside funds to cover these taxes and these are often paid via estimated quarterly taxes.

Estimated Quarterly Taxes

LLC owners are usually required to make estimated quarterly tax payments to the IRS.

These payments cover your income and self-employment taxes throughout the year. Be sure to calculate and pay these payments on time to avoid penalties and interest.

Record-keeping 

When paying yourself through your LLC, you'll need accurate record-keeping for tax purposes. Here are some record-keeping tips:

Payroll Records

If you choose to pay yourself a salary, maintain payroll records, including pay stubs, tax withholdings, and payroll tax filings. 

Distribution Records

If you take an owner's draw, keep records of the distributions made, including the amount and date. 

LLC Operating Agreement

Review your LLC operating agreement or any contracts related to compensation. These documents should outline how compensation is determined and distributed. 

Typically your LLC Operating Agreement will state how much ownership each member has in the LLC and the related percentage of profit.

Work with a Tax Professional

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This blog posting is provided for general informational and educational purposes only and is not provided for specific, individual legal, financial or tax advice.