How Do You Pay Yourself From an LLC?
A common question that business owners ask is: How do you pay yourself? Depending on your business entity type, the question may be: How do you pay yourself from an LLC, sole proprietorship, S corps, or C corps?
Typically, you pay yourself from an LLC through an owner’s draw. However, it depends on the specific type of LLC you have and how the IRS taxes your business. If you operate as a corporate LLC, then you’ll pay yourself through a salary.
If you’re a business owner and you’re wondering how to pay yourself from an LLC, we’ve compiled this guide to help. Let’s look at the specifics.
Table of contents
- What is an LLC?
- Types of LLCs
- Owner’s draw (profit distribution)
- How does an owner’s draw work?
- How do you pay yourself as an LLC?
- Single-member LLCs (one owner)
- Multi-member LLCs (multiple owners)
- LLCs that file taxes as corporations
- How much should you pay yourself?
- Get expert advice and help
What is an LLC?
A limited liability company, or LLC, is a type of business structure that many small businesses use. Setting your business up as an LLC gives you limited liability protection. It means that the owners, typically, are not personally liable for the debts and liabilities of the business.
Your business structure also impacts your taxes. LLCs are pass-through entities, so you’ll report business income and losses on your personal income tax return.
Types of LLCs
If you know your LLC type and how you handle taxes, then you can determine if you pay yourself from an owner’s draw or salary. To help you identify which type of LLC your business is, here’s a breakdown of each type and what it means.
|Type of business structure||What it means|
|Single-member LLC||You have only one owner and you report business income on Schedule C of your personal tax return.|
|Multi-member LLC||You have two or more owners and report your business income and expenses on a partnership tax return. Each owner receives a K-1 at the end of the year.|
|LLC that chooses to be taxed as a Corporation||You’re an LLC but requested for the IRS to tax you as a corporation (either an S corp or a C corp). You must file Form 8832 and/or Form 2553 with the IRS for this category.|
Often, your LLC will use an owner’s draw. We’ll explain what that means and how to use it to pay yourself and other owners.
Owner’s draw (profit distribution)
As the owner of an LLC, the IRS will consider you self-employed. You’re not an employee, so you don’t get paid a salary.
As your company grows and you hire employees, you may change your business structure and opt for a salary. A salary might be right for you because it can be more predictable—you know when your paycheck hits each month.
Owner’s draw vs. salary
Here are some of the main differences between the owner’s draw vs. salary.
|You can pay yourself at regular times or whenever the funds are available. It depends on the number of business owners and how much profit your business brings in.||You’re paid like a regular employee, typically on a weekly or bi-monthly basis with a set amount each paycheck.|
|It’s not subject to payroll taxes. But, it’s still taxable. You must set aside funds to pay self-employment taxes and estimated quarterly taxes.||You must withhold taxes from each pay period.|
How does an owner’s draw work?
LLCs must keep separate records for business and personal expenses. An owner’s draw is a way for business owners to take their business profits and pay themselves.
Most LLCs use it to distribute profits from the business to one or more owners. You’re not required to make withdrawals from it and may reinvest the funds back into your business rather than pay yourself.
Business owners decide how much to withdraw. Of course, you should leave enough money to pay vendors, cover expenses, and invest in your company’s growth.
The IRS will tax your business profits, not the money you transfer from an owner’s draw. You must still pay self-employment taxes (Social Security and Medicare) and income taxes. But, it’s not the same as when you get a salary.
How do you pay yourself as an LLC?
Here are different LLC business structures and how owners pay themselves. Note: If you run your own business, have no employees, and didn’t register as an LLC, then you’re a sole proprietor. Sole proprietors pay themselves informally via distributions from the profit they make.
|Owner’s draw (distribute profits)||Salary|
|Single-member LLCs||LLCs that file taxes as corporations|
|Multi-member LLCs and partnerships|
Let’s look at how to pay yourself as an LLC in more detail below.
You can treat a single-member LLC the same as a sole proprietorship when paying yourself.
To pay yourself from a single-member LLC, you use the owner’s draw and take money out of company profits whenever you need it. Remember, business owners must keep their personal finances separate from company finances. Otherwise, your company could lose its liability protection and put owner assets at risk in the event of a lawsuit.
How to pay yourself
To pay yourself, you’ll need to take the funds from your business bank account. You can simply write yourself a check or use accounting software to send them to your personal account. If you use Quickbooks, you’ll need to set up an Owner’s Equity account first to keep it separate from payroll.
The most important thing about an owner’s draw is to make sure you properly document each time you make a draw.
If you transfer money directly between your business and personal accounts, label the transactions. You can add a memo or document the transaction in your accounting software.
The IRS treats multi-member LLCs like partnerships when it comes to taxes and paying owners. (Note: A partnership is a separate business entity from an LLC that doesn’t include limited liability protection.)
How to calculate pay for multiple owners
If you own a multi-member LLC, you can take these steps to calculate how much to pay each owner:
- Determine how much each member contributed to the LLC: You can do this by looking at their initial investment amount and additional contributions.
- Calculate what percentage of the LLC each member owns: Typically, you’ll set an ownership interest when forming an LLC. It states how much money each member invests and what percentage of the business they own.
- Distribute business profits and losses: You can do this proportionally to each member’s ownership interest. However, you can also choose to distribute them to reflect each member’s contribution to the business. For example, if one member contributed more capital, you may want to give that member a larger share of the profits.
Note, there is no requirement for distributions to be equal or fair. You should create partnership agreements that outline how to distribute pay.
To pay multiple owners, follow these steps:
- Set up a draw account for each member.
- Keep track of all withdrawals so you don’t overspend or run into other financial problems.
- At the end of the year, report the amount you distributed to each partner on your tax return. (Form 1065 for partnerships)
LLCs that file taxes as corporations
Most LLC business owners will use an owner’s draw to pay themselves. However, if you applied for the IRS to tax your business as a corporation, you must pay yourself a salary.
You can request that the IRS tax your LLC as a C corporation or S corporation.
To pay yourself from either, you need to create a separate business bank account. Also, you must use a payroll system and withhold, report, and submit payroll taxes.
How much should you pay yourself as an LLC?
When setting your salary, consider the type of LLC, your business profitability, and your personal financial needs. There are many methods that business owners use to estimate how much they should pay themselves. For example, you could get a general idea with the 50-30-20 rule.
In personal finance, individuals use the 50-30-20 rule to help set their own budgets. It breaks down after-tax income by setting aside:
- 50% for needs (housing and other bills)
- 30% for wants
- 20% for savings
You can adapt it for your business too. First, make sure you have set aside enough to cover your regular expenses (vendors, suppliers, software, payroll, etc.). Then, you could divide your profit up like this:
- 50% for paying yourself and other owners
- 30% for saving for taxes
- 20% for reinvesting into your business
This isn’t a foolproof or exact method though. It’s more of a starting point, and you’ll need to assess your particular situation and refine it for you and your business goals.
Ultimately, there is no single answer to this question. The amount you pay yourself should be based on factors specific to your business and your personal circumstances.
Get expert advice and help
When you work with us, you get access to a team of bookkeepers, CPAs, and finance experts in one place. In addition to advising you on how to pay yourself as a business owner, here are a few more examples of how we can help:
- Preparing and filing your business taxes and making sure you get all the tax deductions and credits available to you.
- Providing monthly financial statements and insight into your business health.
- Managing your day-to-day bookkeeping and accounting tasks.
To get started, you can view our plans here or schedule a chat with an expert. We’ll schedule a 20-30 minute call to get to know your business and unique needs. Then, we’ll help you decide which services best suit you and your goals.