Your business is set up as a Limited Liability Corporation (LLC) and revenues are coming in. Now that the enterprise is succeeding, it’s time to ask yourself the next question—how do you get your hands on the cash? Let’s walk through 5 methods of how to pay yourself from an LLC.
#1: Wages
You can treat yourself as an employee and pay yourself a salary. This has the virtue of simplicity to it, but there are a few nuances to the law. The first is that if you must be an active member of the business—i.e., you must be acting as an employee with a regular role. If you’re a partner whose role is mostly to provide funds and perhaps the occasional piece of advice, you will not qualify.
If you are doing enough work to qualify, you still have to be treated the same as other partners in the LLC. Let’s say 3 of you started the business. Two of you work full-time, but the third person is a more passive partner. That doesn’t matter when it comes to salaries—either all 3 of you get them, or none of you do.
In the event you do qualify for a salary, make sure the amount is considered reasonable for your industry and your duties. The IRS provides guidelines for determining what to pay yourself.
#2: Distribution
In this case, you don’t take any salary at all, but just accept your share of the distribution of profits. This is even more simple than the first possibility because you don’t need to worry about the various requirements discussed above. But it’s also the riskier of the 2 if your business income is still fluctuating.
#3: Independent contractor
Another possibility is to pay yourself as an independent contractor. Let’s say you and 2 other people started up a plumbing business. You primarily do office work, but your background enables you to go into the field at busy times. You could choose to bill your time in the field as an independent contractor.
This makes sense in a lot of ways—if you couldn’t perform the work your company might have to bring on a freelance contractor for temporary assignments and pay them the same way. So why not you? Just be aware that you’ll have to send yourself a 1099 form at the end of the year reporting the income that was paid to you, and taxes will be owed.
#4: Owner’s draw
This only applies when the LLC is a one-person show. You can take a draw against the value of the business to provide you with short-term income. This does have long-term disadvantages—like double taxation. But it can allow you to meet short-term income needs without disrupting the entire structure of the business.
#5: Let the profits pass through
This is the fancy way of deciding to pay yourself nothing. You’ll just let the profits of the business pass right through to your personal tax return.
