Become an LLC business owner and you will be able to pay yourself with considerable ease. LLCs empower business owners to complete self-payment either as an employee of the organization or through the LLC’s profits. Though most LLC owners typically wait until their company is up and running to pull money out for self-payment, there are some situations when it is necessary to pay oneself while the business is in its early stages and/or in the red.
Self-payment from an LLC must be performed in the proper manner as detailed below. Fail to follow these guidelines for LLC self-payment and you will face legal penalty. This is precisely why most LLC owners consult with a trusted attorney for self-payment and other matters that have the potential to trigger harsh legal consequences. Let’s take a look at the options available for those who would like to pay themselves through their own LLC.
An Overview of LLC Self-payment Options
Those who elect for self-payment through the LLC profits should make their intention clear when the LLC is being formed. Those who opt to be paid as an employee can receive payment while categorized as an independent contractor or as an actual employee of the business. The specifics of your unique tax situation ultimately dictate which form of payment is optimal.
LLC Self-payment Through Employee Wages
Active members of LLCs are eligible to be compensated in the form of wages. However, in order to be categorized as an active member of the LLC, the individual in question must have worked more than 500 hours for the organization in a single year. If the LLC member has invested in the business yet is not active, he or she is ineligible to receive wages. However, such an individual is eligible to receive LLC profit distributions.
LLC Self-payment Through the Company’s Profits
Every LLC member is legally permitted to receive compensation through the year-end profit distribution. This is regardless of whether they are active or inactive. The payout structure usually reflects the member’s percentage of ownership in the overarching LLC. However, the specific payout ratio is determined when the LLC is formed. As an example, rather than an active member being paid wages, he or she can receive a larger payout ratio than members who are inactive. Profits stemming from the LLC are taxed as though they are income.
LLC Payment Through Draws
Draws are withdrawals pulled directly from the LLC earnings. Members typically do not take draws unless the business is turning a profit. Since draws are not considered an expense, they are not deducted from the LLC revenue. In other words, draws are best thought of a distribution of profits from the organization to its owners. Instead of relying on wages for self-payment, LLC business owners can use draws. Draws are optimal when the LLC member would like to receive payment of profits at specific intervals instead of waiting until the year has ended. However, draws are not considered wages as the funds are sourced form the LLC capital account.
At year’s end, the capital account drawdown stemming from the cumulative draws must match the aggregate profit. Each time a LLC member receives the draw, the capital account is reduced by that specific amount. When the year ends, the profits are tallied and the capital account increases. In other words, payment made through a draw is the equivalent of receiving advanced payment in accordance with the company’s anticipate year-end profits.
LawTrades is on Your Side
If you are an LLC owner or thinking of launching your own LLC, get assistance from a proven business attorney. We are here to help you start your LLC, maximize profitability during LLC ownership and remain well within the confines of the law as an LLC owner. Our services will help you form your business, protect your intellectual property, craft bulletproof legal agreements and ultimately improve your bottom line. The right business attorney is available for your specific needs.