In this article learn how to pay yourself from an LLC, as well as the differences between a single member or multi-member LLC and the benefits of switching to be taxed as an S-Corp.

First things first. You should always have your businesses set up in a legal entity like an LLC. An LLC is a hybrid business structure that combines some of the most attractive features of corporations and sole proprietorships. Like corporations, all types of LLCs provide limited protection against personal liability, which is why you need one.

Once you have one, in general, business profits and losses are reported on your personal income tax return rather than a business tax return, and no annual meetings are required. Specific laws vary by state, but in general, LLC owners are called members. And there can be as many members in business as you like.

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A question we get a lot is “How do I pay myself from an LLC?“ Well, it depends on the type of LLC. Here’s what you need to know.

Single Member LLC

For a single member LLC, rather than taking a conventional salary, single-member LLC owners pay themselves through what’s known as an owner’s draw. The amount and frequency of these draws is up to you, but it’s ideal to leave enough funds in the business account to operate and grow the LLC. You simply write yourself a check, keep track of it for tax time, and then you’ll pay taxes on it at the end of the year on Schedule C of your personal tax return. And when you do pay taxes, you’ll pay both your personal and company portion of FICA and other employment taxes.

Multi-Member LLC

For a multi-member LLC with two or more members – think owners – the LLC members also pay themselves through the owner’s draw method. The members can each draw as much or as little of their shares as they choose, as long as sufficient funds remain on hand for day-to-day business expenses and growth. Each member will be responsible again for their personal taxes and the company portion of employment taxes. And these will generally show up on a K-1 partnership statement at the end of the year.

LLC’s Taxed as a Corporation

For an LLC that has elected to be taxed as a corporation like an S-corporation or a C corporation, members aren’t allowed to take owner’s draws. Instead, they’re considered employees and must pay themselves a set salary on the company’s regular payroll with taxes withheld. The salary has got to be “reasonable” but any left over at the end of the year can be distributed to the members and guess what, no personal or company employment tax liability so you save 15.3 percent!

If you’ve got questions about how to convert to an S-corporation, drop us a note and we’ll get you the information you need.