How Does an LLC Owner Get Paid?

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

So, you want to form an LLC. You have probably heard about how great they are for asset protection and to make your business look more “official.”

Setting up an LLC isn’t hard to do. In fact, in most states, you can do it all by yourself. But as you go through this process, you’ll probably find yourself asking questions like:

“How do I get paid?”
“Do I have to cut myself a paycheck?”
“How does this work with taxes?”

The answers depend on the structure of your LLC and your overall asset protection strategy. So remember to always talk to a legal professional before you set up an LLC or similar business structure.

How Does a Single-Member LLC Owner Get Paid?

When you own a single-member LLC, you have the option to be treated as a corporation. (Read information on how this structure affects payment later on in the post.) If you don’t choose to be treated as a corporation, you are pretty much lumped in with sole proprietorships in the eyes of the IRS. (The more official title is a “disregarded entity.”)

As the owner of a single-member LLC, you are not an employee. You will not need an EIN, and you don’t have to fill out a 1099 for yourself. In order to get paid, you will need to draw from the LLC’s profits. This act is known either as a “draw” or an “owner’s draw.” The profits are also known as “distributions.”

How to Complete an Owner’s Draw

There are three ways to draw from an LLC’s profits: write yourself a business check, withdraw cash, or transfer funds directly to your bank account from the LLC’s account. Not all of these options are available to everyone. Check with your bank on whether it’s possible to transfer funds to your personal account. A check may be necessary to get paid.

How Does a Multi-Member LLC Owner Get Paid?

If you enter into an LLC with someone other than your spouse, you will have to abide by the rules as a multi-member LLC. Luckily, those rules don’t stray too far from the rules for single-member LLCs.

Like owners of a single-member LLC, owners of a multi-member LLC can simply write a check or transfer funds to pay themselves. But owners of a multi-member LLC will have to decide on each person’s share in the company. This will likely determine how much each member will get paid. And it will certainly determine how much profit the member will have to report on their taxes.

Stay on the Same Page

Do not start paying yourself without discussing these matters with your business partners. Everyone needs to be on the same page. Sit down and discuss when each member will get paid, how much they will get paid, and other matters regarding compensation. Put these rules and policies into your operating agreement to hold everyone accountable and have things in writing if confrontations arise.

Be Careful Around Tax Season

Remember that draws are not paychecks. You are not making any contribution to Social Security or Medicare when you take the money out of your profits. When you report your earnings on your taxes, you must report both the LLC’s profits and your draws.

Anyone who earns money with the LLC as an independent contractor will also have to follow these rules. Only W-2 employees can expect any money back come tax time. If you want to stay on top of your taxes and prevent paying a lot in April, consider paying taxes quarterly.

If You Treat Your LLC Like a Corporation…

In this instance, you have to abide by different rules. If you want to get paid as the owner of an S-corporation, you may have to write yourself a paycheck. (Weird, right?) You will be a W-2 employee. As the owner, you will have to fill out the right forms to ensure that taxes are taken out of your paycheck.

The rest of the profits are reported on your personal tax return like any other LLC. Know that these earnings are subject to fewer taxes. For many potential LLC owners, this structure sounds like the best option.

But be careful. The IRS may take a look at how much you are paying yourself. Some LLC owners try to squeeze more money out of their business by paying themselves a very small salary and getting the rest of the distributions at a time when it won’t be taxed too highly. This can be a tricky game to play.

Laws May Vary From State to State

Not all states treat LLCs the same. Florida, for example, doesn’t allow single people (or married couples) to go into an LLC alone. If you want to set up an LLC in one state, however, you may be able to operate in a different state and get around the rules.

Talk to a CPA or legal services provider for more information on properly setting up an LLC and what you need to report on personal (or business) taxes.

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.