Overview of Payment Methods for LLC Owners
As an LLC owner, there are various ways to get paid. For single-member LLCs, owners can take draws from profits. For multi-member LLCs, partners divide draws and distributions. LLCs taxed as corporations require owners to take salaries complying with IRS rules, in addition to draws.
Multi-member LLCs can default as partnerships but may elect corporation status. Partnership LLCs allow owners to take earnings as draws; however, they must report all profit distributions since they are "pass-through" entities. Self-employment taxes must be paid on net income.
Deciding Your Payment Percentage
Most businesses make quarterly tax payments. To decide the percentage to pay yourself, consider that a good target is 5 – 10% of your take-home pay for your savings goals.
Best Practices for Business Owners’ Pay
Business owners can pay themselves through a draw, a salary, or a combination method. Draws are direct payments from the business, while salaries go through the payroll process with taxes withheld. Combination methods blend salary with draws or distributions.
Understanding LLC Payment Options
An LLC combines features of corporations and sole proprietorships. If taxed as a corporation, you must also take a salary meeting specific requirements.
The owners of an LLC usually receive their income via draws. Draws for multi-member LLCs are divided among the partners, while those taxed as a corporation may also receive a salary.
Owner’s Draw Method
To pay yourself from an LLC, the owner’s draw method involves writing a check from your business account to your personal account. These funds are taxed on your personal taxes, assuming you’re taxed as a sole proprietorship, which is the default for single-member LLCs.
Factors to Consider
When deciding how to pay yourself, consider simplicity, liability protection, and how the chosen method impacts taxes and the legal distinction between you and your company. Taxes are among the main considerations for choosing your payment method from your LLC’s profits.