The beginning stages of starting a business can be thrilling. You took a great business concept and developed it into an actual company — congrats! Now, let’s say you formed your company as a limited liability company, or an LLC. After this step, you might be wondering how, exactly, you get paid.
It’s definitely possible to pay yourself when your business is an LLC. Here's what you need to know.
Let's start at the very beginning. As we noted above, LLC stands for limited liability company. An LLC is considered a hybrid business structure, combining aspects of both a corporation and a partnership. It can provide the protection of a corporation with the tax efficiencies and operational flexibility of a partnership.
Like corporations, LLCs can provide limited protection against personal liability. This reduces the risk of being held personally responsible for your company's debts and financial responsibilities.
Similar to sole proprietorships or partnerships, LLCs can offer flow-through taxation to members. The business profits and losses are reported on your personal income tax return (instead of a business tax return) for LLC organizations. Plus, no annual meetings are required.
LLCs are a common business structure for small business owners and entrepreneurs because of the tax benefits and liability protection they offer, without the formalities of a big corporation.
If you’re thinking of classifying your small business as an LLC, there are a few different types to consider. The following two options are the most commonly used for small businesses:
If there are no other members of the LLC aside from you, it’s considered a single-member business, and can be taxed as a sole proprietorship or a corporation. Freelance writers, electricians, painters, consultants, and other contract workers often create an LLC for their business.
If your LLC does have additional members, it’s considered a multi-member LLC, and can be taxed as either a corporation or a partnership. A multi-member LLC consists of more than one owner who are members. For this type of LLC, there can be as many members in your business as you’d like.
Okay, let’s get down to the nitty gritty. How do you pay yourself from an LLC? Well, you’ve got a few choices.
First, you should know that you’re not required to take a salary from an LLC. While this may not work for everyone, it’s still good to know you have the option. This decision might be best for you if you want to keep the money in the business, or if the company isn't generating enough revenue to pay you.
But when your business is profitable, and you decide you’re ready to take money out of your organization, there are two primary ways you can pay yourself.
As an LLC business owner, you can do one of these two things:
You can choose to take a salary, or
You can take an owner's distribution
To be able to pay yourself wages or a salary from an LLC, you have to be actively working in the business. For many LLC owners, the most advantageous way to receive payment is to treat themselves as employees.
In this arrangement, you (and other owners who actively work in the business) receive paychecks just as you would if you were an employee at someone else's company. This has a few advantages. First, it’s a way to set yourself up with predictable pay. Secondly, regular wages allow you to better budget for your personal needs. There’s one thing you should note, though — if you have a multi-member managed LLC, you cannot pay one member a salary and not the others. Of course, this is a nuanced issue, so you'll always want to consult a tax professional on this topic.
Sometimes referred to as an owner's draw, distributions are the amounts of money you take from the business and give to yourself. In a multi-member LLC, all members can be paid with an owner's draw.
Unlike a salary, an owner's draw can vary in amount and timing. Distributions are payments made to LLC members from profits and aren’t actually considered wages.
You and/or your business partners can agree to pay yourselves however often and in the amount you choose.
Owner's distribution means you and/or your partners can simply write yourselves checks or transfer the money for your business profits from your LLC's business bank account to your personal bank accounts. Of course, you will need to keep track of how much you pull from the business each year for applicable tax purposes.
In addition, distribution amounts can vary from year to year and can be adjusted by adjusting the LLC's profits.
The flexibility of an owner's draw is advantageous for new LLC owners. As you might know firsthand, it can take time before new businesses begin generating a consistent level of revenue. The owner's distribution may allow you to balance the budget more efficiently by paying yourself and members on terms best for the business.
One other type of payment worth mentioning is an expense reimbursement. While this is not a method to use for issuing yourself or your other members a consistent paycheck, it is a way to pay back LLC members for business expenses incurred while they conducted business on behalf of the LLC.
There’s no getting around it — taxes are complicated. And when you’re filing business taxes and personal taxes, it's easy to get things mixed up.
In the eyes of the IRS, an LLC can be taxed in different ways, including as a partnership or a corporation. There are tax benefits, however, that your LLC might qualify for. These might include:
Flexibility. Because you’re permitted to choose how your LLC will be taxed, you have the flexibility to choose the most beneficial approach for your company.
Pass-Through Deduction. The Tax Cuts and Jobs Act (TCJA) allows members to deduct up to 20% of their business income before calculating tax. This regulation may help LLC members to avoid higher self-employment and income taxes.
Reimbursement. As we noted above, the payment of expenses incurred by LLC members while conducting business on behalf of the LLC are tax deductible.
Remember to consult with a tax professional and/or refer to the official IRS guidelines to ensure accurate tax treatment based on your specific situation.
We know you’re proud of starting your business — we’re proud of you, too! But that doesn't mean you can afford to work for free. However, figuring out how to pay yourself as a business owner can be complicated.
Justworks Payroll can assist with your employment-related payroll needs, both for as you're getting up and running, and as you grow and scale. Or, for a more robust payroll and HR solution, Justworks PEO can be a great fit. It can get you and your team access to benefits, and help you manage the other aspects of running your business.
Ready to learn more about how Justworks can help you free up time to spend on supporting your people and growing your business? Contact us today to get started.
Monthly tips on running a business in your inbox.
Justworks is a technology company that levels the playing field for all small businesses. Through our software and as a partner, we help our customers take care of their teams, streamline their operations, and navigate the complex aspects of managing a workforce with confidence.
Scale your business and build your team — no matter which way it grows. Access the tools, perks, and resources to help you stay compliant and grow in all 50 states.