Many who start businesses are single-member limited liability companies (SMLLC), and this is because the LLC provides asset protection and flow through taxation. If you have an LLC, this article talks about legally pulling money out of your company.
Quick note – Please talk to a professional tax planning attorney to understand your unique set-up and state and local laws.
You’ve decided you’re ready to start your own business. Maybe you have an excellent idea for a product or service that hasn’t been done before. Or you see an opportunity to sell something at a lower cost and make more money than your competitors. Whatever the case, you’ve decided to go solo and become an entrepreneur.
If this sounds like it could be you, then congratulations! But while starting a business is exciting, there are some essential things to keep in mind before taking the plunge. One of these is how much money you’ll need to earn to pay yourself as an owner of an LLC.
Are You a Single Member LLC?
If you own a single-member limited liability company, you can pay yourself as an employee. The Internal Revenue Service (IRS) considers any payment to an owner or member of an LLC as wages and subject to employment taxes. Your state may also have its own employment laws.
What Is a “C” Corporation?
If you have chosen to be treated as a “C” Corporation, then this means that you are taxed as though your business were a corporation. This means any profits will be taxed at the corporate level and then again when they are distributed to the shareholders (you). In this case, there is no employer-employee relationship between yourself and the business because it is not considered a separate legal entity from you – one person still owns it. If this applies to you, paying yourself as an employee would not be beneficial because it would result in double taxation on any profits.
What Happens If You Elect To Be Taxed As an “S” Corporation?
When you own an LLC, you can elect to be taxed as a sole proprietorship or as an “S” corporation. The benefit of being taxed as an “S” corporation is that you can pay yourself as a shareholder in your business, and the income will be reported on your income tax return.
You must follow specific rules if you elect to be taxed as an “S” corporation. These rules include:
- You can only pay yourself if the LLC is profitable or if there are profits available for distribution after paying other expenses such as payroll taxes or loan payments;
- If you pay yourself more than $600 per year, all distributions must be reported to the Internal Revenue Service;
- You must also report any distributions on your income tax return; and
- Any distributions made must be treated as wages from an employer-employee relationship with the IRS (even though the IRS does not consider single-member LLC employees).
- The best way for new owners to determine what they should take home is by looking at similar businesses or companies in their industry and comparing salaries with those companies’ employees who hold similar positions (such as executives).
Paying Yourself as a Single Member LLC of an “S” Corporation
Simply put, you should NEVER pay yourself more than you need to live on. Your salary as a single-member LLC is inherently connected to the Employer Identification Number (EIN) assigned to your company by the IRS. Many entrepreneurs simply have an LLC set up and file as a disregarded entity under the “S” Corporation because they need limited liability coverage. Making an “S” Corporation election allows you to avoid creating a partnership (2 or more owners) while still receiving the benefits of flow-through taxation (no double taxation like a traditional “C” Corporation).
Click here to download our payment example PDF for LLC vs S-Corp.
At Fleurinord Law PLLC, we make it a point not to just draft documents; we ensure you make educated and empowered decisions about your transition from life to death for yourself and the people you love. We offer a Family Legacy Planning Session. In preparation for this session, you will get more financially organized, which will help you make the best decisions to protect your assets. Call our office at 888-904-2297 today to schedule your initial discovery call and find out how to save $750!