An LLC is a great way to organize your company to protect yourself from liability, but it’s also likely you want to make money from your business. There are several ways to go about paying members of an LLC — including you.
The rules for paying LLC owners
When you are one of the owners of an LLC, you are called a member. If the LLC is taxed as a normal LLC, its members cannot be employees or receive salaries.
One of the benefits of an LLC is that the business entity does not pay taxes. Instead, the profits and losses of the business pass through to the members, who must report them on their personal income tax forms. Each member is taxed on his share of the profits in accordance with his allocation percent.
When you set up the LLC, you’ll decide if the members will share profits equally based on their ownership percentage or on an allocation share you determine. For example, if there are three members and each owns a third of the company and allocation is equal to ownership, they each must report one-third of the profits or losses on their own taxes.
The exception to the rule about members not being employees is if the LLC elects to be taxed as a corporation. If the LLC itself pays taxes directly to the IRS, which means the members do not report profits and losses on their individual tax returns, then members can be employees and receive salaries.
How do I get paid If I’m not an employee?
As a member of the LLC, you can receive profits from the company throughout the year or at the end of the year.
When you set up the LLC, you and the other members create what is called a capital account. The amount you invest in the company goes into the capital account, as do any profits that belong to you.
Any time you take a “draw” of funds, money is withdrawn from your share of the capital account.
If you’ve withdrawn funds throughout the year from the capital account, your share of the profit at the end of the year will be placed in the capital account, paying back your draw.
You can choose to withdraw any additional profit at that time. Any funds you withdraw or receive are not directly taxable as income like a salary would be. Instead, you are taxed strictly on your percentage of the profit or loss of the company itself. That means if some profit is kept in the company and not paid out, you would still pay tax on it even if you didn’t withdraw that profit.
Working as an independent contractor for your LLC
There is another way to get paid by your LLC: hiring yourself as an independent contractor. If your LLC, for example, needs a new logo, you can hire yourself to design the logo and get paid for that work. You will have to pay self-employment tax on this income.
Skip the payments
You can decide not to receive any profit distributions at all and keep the money in the company, if you like. You will, however, still pay income tax on your share of the profits, whether you withdraw them or not.