How to Pay Yourself With an LLC

Limited liability companies (LLCs) are a terrific way to structure a small business to limit the owner's financial risk and maintain tax flexibility. With the proper management and bookkeeping, these business entities can prove lucrative. However, structuring your business as an LLC requires you to take added care of company finances and how you are paid.

The Internal Revenue Service (IRS) says LLC owners must pay themselves a "reasonable amount" for their work. But that guidance isn't beneficial since it fails to define what is reasonable. The fact is, new small business owners must be diligent in their bookkeeping and practice moderation in the amounts they pull from the company to pay themselves.

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Key Takeaways

• LLCs provide business owners with limited risk to their personal assets and a higher degree of tax flexibility.
• How you pay yourself as an LLC owner depends on a variety of factors.
• The owners of single-member LLCs and partnership LLCs can make payments to themselves through an "owner's draw."
• If you work for a multi-member LLC, you must first pay yourself reasonable compensation. Then you can take your tax-free owner's draw.

Paying Yourself as a Single-Member LLC Owner

The default tax status for this type of entity is the sole proprietorship. As single-member owners, sole proprietors are not viewed as separate from their business entities. That means a single-member LLC's profits are treated as your personal income and subject to self-employment taxes. These profits are reported as income on the owner's personal tax return (IRS Form 1040).

Single-member LLC owners pay themselves through an "owner's draw." The purpose of the owner's draw is to notate the amount of the LLC's income that will be treated as company earnings versus the amount that will be allotted to personal assets. As a single-member LLC, you will not be required to pay income tax on an owner's draw since it was already subject to tax as company income.

Performing an owner's draw for a single-member LLC can be done in a few easy steps:

1. Write: Write a check to yourself from your company's business account. This step requires that you have a business bank account with an Employer Identification Number (EIN). If you do not have a business bank account, you will need to get one.
2. Cash: Next, you will take your business check and deposit it into your personal bank account.
3. Record: Finally, go into your business records and mark this withdrawal as an owner's draw.

Paying Yourself as a Multi-Member LLC Owner

Paying yourself from an LLC with multiple owners depends on the LLC's tax status. Is the LLC taxed as a corporation or a partnership? Partnership LLCs can draw from their profits like sole proprietorship LLCs. Corporate LLC owners may be unable to make these draws. Read on for details on how these multiple-member LLC types pay their owners:

• LLCs taxed as partnerships: Partnerships are the default tax structure for multi-member LLCs. Unlike sole proprietorships, partnerships are subject to pass-through taxation. Here, the taxes bypass the company level, and the IRS assesses them as income on the owners' personal tax returns. With this structure, owners can make draws similar to single-member LLCs. However, the owners pay taxes in whatever proportion was agreed upon in their initial partnership agreement, regardless of the amount of their owner's draw. Finally, each partner will also be required to pay the 15.3% self-employment tax on their portion of the income.
• LLCs taxed as S corporations (S-corps): Owners must be treated as employees and paid a reasonable salary subject to employment taxes. Amounts paid to LLC shareholders who work for the company that are more than their reasonable salary can be taken as tax-free draws. Any draws made by owners who do not work for the LLC may be made tax-free. If an owner's draw is more significant than their initial investment, it is subject to the capital gains tax.
• LLCs taxed as C corporations (C-corps): These operate like S-corps, with a few key differences. The main thing to remember here is that C-corps are subject to double-taxations. Here, the IRS taxes your LLC's profits at the corporate tax level. Then owners pay taxes on any individual earnings again at the personal income level.

How Much Should You Pay Yourself?

The IRS requires that owners who work for an LLC pay themselves a "reasonable amount" before they can take an owner's draw. That rule is in place to prevent owners from avoiding employment or self-employment taxes by only paying themselves a nominal salary and taking the rest as an untaxed owner's draw.

If you are an LLC owner working full-time, and your share of the profits is $50,000, you can't take a $1 salary that is subject to the employment tax and the remaining $49,999 as an owner's draw.

Unfortunately, that means you will need to determine what your reasonable compensation should be. When calculating your reasonable compensation, you should compare the number you arrive at with industry standards. If you know other small business owners in the same industry, rely on their experience and advice to determine the average wages for your role.

Need More Help? Contact a Lawyer

Determining how much you should pay yourself as a small business owner isn't always cut and dry. Every business is different, and every owner has their own set of circumstances and challenges to face. If you need help in these matters, consider seeking business compliance services through a trusted provider.

FindLaw's expansive database of experienced legal professionals can help put you in touch with a qualified local attorney today.

Related Resources

• LLCs
• Filing LLC Taxes
• Forming an LLC: Writing and Filing the Articles of Organization
• Tax Differences Between C and S Corporations