Running a limited liability company (LLC) can be a rewarding venture, but as a business owner, it’s important to understand how to pay yourself from your LLC’s profits. While the process may seem straightforward, it’s crucial to navigate it correctly to maintain financial stability and ensure compliance with legal and tax obligations. In this guide, we’ll explore essential steps and considerations for getting paid in your LLC.
Establishing a Compensation Structure
As an LLC owner, you have several options for determining how to pay yourself. It’s important to establish a clear compensation structure that aligns with your business goals and complies with legal requirements. Here are three common methods:
a. Owner’s Draw: This method involves withdrawing funds directly from the company’s profits. It’s a straightforward approach but may require diligent bookkeeping to accurately track your personal withdrawals.
b. Salary: You can establish yourself as an employee of the LLC and receive a regular salary. This method provides stability and simplifies tax withholding and reporting obligations. Ensure the salary aligns with fair market value and consider consulting a tax professional to determine the optimal amount.
c. Profit Distributions: LLC owners can receive payments based on their ownership percentage. This method allows you to distribute profits among owners while avoiding some self-employment taxes. Consult with a tax advisor to determine the most tax-efficient distribution strategy.
Maintain Accurate Financial Records
To ensure proper payment management, it’s crucial to maintain accurate financial records for your LLC. Implement a robust accounting system to track income, expenses, and distributions. This will help you monitor the financial health of your business and provide documentation for tax purposes.
Comply with Legal and Tax Obligations
Operating within legal and tax frameworks is essential for every LLC owner. Here are a few key considerations:
a. Consult Professionals: Seek guidance from an attorney or tax professional who specializes in business law and taxation. They can assist you in structuring your compensation strategy, ensuring compliance, and maximizing tax benefits.
b. Employment Laws: If you choose to pay yourself a salary, be aware of applicable employment laws such as minimum wage requirements, overtime regulations, and employee benefit obligations.
c. Self-Employment Taxes: As an LLC owner, you may be subject to self-employment taxes, including Social Security and Medicare. Understanding your tax obligations and working with a tax professional can help you navigate these requirements effectively.
Budgeting and Cash Flow Management
Maintaining a healthy cash flow is vital for the success of your LLC. Create a budget that includes your personal living expenses and set realistic salary or withdrawal amounts accordingly. Consider your business’s financial stability, growth plans, and reinvestment needs when determining your compensation.
Periodic Reviews and Adjustments
Regularly review your compensation strategy to ensure it aligns with the financial health and growth of your LLC. Adjustments may be necessary as your business evolves or during periods of economic change. Consulting with professionals and revisiting your strategy will help you make informed decisions.
Conclusion
Paying yourself from your LLC requires careful planning, adherence to legal and tax requirements, and a solid understanding of your business’s financials. By establishing a compensation structure, maintaining accurate records, and seeking professional advice when needed, you can navigate the payment process smoothly and enjoy the rewards of your hard work as an LLC owner. Remember, every business is unique, so tailor your approach to your specific circumstances and consult experts to ensure compliance and maximize financial benefits.
Video Transcript
How Does Your LLC Pay You?
So if you are starting a new business, as a business owner, you might be thinking, how do I get paid? What does that look like? I have always received a paycheck. Do I start issuing a paycheck? And how do I do that if the company doesn’t have money to pay me?
Let’s face it, most new businesses, they don’t generate money right away. In fact, you are going to have to put money in to get things started, to start setting up a website and setting up the legal work and the LLC or S Corporation or whatever it is. You are going to put money in before money comes in typically.
So how does the LLC pay you? First, it doesn’t have to pay you. So if the LLC doesn’t have any money to pay you, you don’t get paid. So that is okay. It is not like you have to borrow money to pay yourself, and besides, who is going to loan a new LLC money anyway?
So first off, you don’t have to get paid. But now, let’s assume the LLC is making money. Let’s say it has $10,000 in profits in there that it is not going to need for its ongoing operations. Those profits are available to be distributed to you as the owner of the LLC. By the way, the owner of the LLC is called a member. In a corporation, we call the owners shareholders. In an LLC, we call the owners, members. So as a member of the LLC, you are entitled to have profits distributed to you. You can also pay yourself as an employee.
In general, what LLC owners do is pay themselves a profit distribution. All they do is write a check from the LLC’s bank account to their own personal bank account for whatever amount of profits they want to distribute to themselves. And what do they call it? They call it a profit distribution. So in the memo line, you can put profit distribution.
So it might be from Jenny’s Flowers LLC to Jenny Smith with a memo line that says profit distribution and the dollar amount says $10,000, and then Jenny cashes that in her personal bank account. The money comes out of the business bank account and goes into Jenny’s individual personal bank account.
Now You Might Be Wondering, Can You Just Do an Account-To-Account Transfer?
Sure, you don’t have to go through the process of writing a check. You can go ahead and just do an account-to-account transfer like log into your banking system and transfer money from one account to the other.
Here Is the Key.
You will need to keep track of this at the end of the year because profit distributions are taxable. And so you are going to pay both income tax and self-employment tax, which is about 15%. So income tax, let’s say you are in a 30% tax bracket. And by the way, there is federal income tax, state income tax, if your state has an income tax, and then payroll tax. And so all of those need to be paid.
As a general rule, my suggestion to business owners is to put away half of the money they receive in profit distributions so that they have money set aside at the end of the year when they need to pay their taxes because payroll tax, state income tax, and federal income tax all add up and generally it adds up to somewhere between 35% and 50% of the money that came into you.
There is a side issue here we are not going to get into today, and that is for an S Corp. We might deal with this a little bit later if people have questions about it. So feel free to add a question in the section below, but there is a separate way that you would handle paying yourself for an S corporation. And there can be some tax savings with that, depending on the circumstances.
Conclusion
Okay. So just to kind of conclude, how do you pay yourself in an LLC? The LLC writes a check to you personally for the profit distribution amount, and then you end up having to pay tax on that at the end of the year. It is a pretty large amount. It can be up to 50% or so. Sometimes a little bit more, depending on your tax bracket, so make sure you set aside money for that.
We have covered all the questions we have time for today. Love to have you at a future live session if you would like to know about these and by the way, they are usually not available in full online unless you hop onto them live, then you can watch them.
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