One of the most challenging aspects of operating an LLC is how to pay yourself. LLC members can earn profits and losses through the LLC without ever cutting themselves a paycheck. Since a single-member LLC is taxed similarly to a sole proprietorship, the owner can simply cut himself a check. Multiple-member LLCs have the choice between a guaranteed payment and an owner's draw.
LLC Taxation Basics
LLCs can be either single-member LLCs or multiple-member LLCs. As the names imply, single-member LLCs can only have one member, while multiple-member LLCs can have more than one. Multiple-member LLCs allocate a certain amount of LLC profits and losses to each member. The LLC itself never pays income tax. Instead, all profits and losses flow through to members, who pay taxes at the individual level.
Sole Member LLCs
Paying yourself as a single-member LLC is fairly simple. When you need to get cash out of the business, write yourself a check, account for it as a reduction in equity, and deposit it in your personal bank account. Single-member LLCs are taxed like sole proprietors in the sense that you'll report LLC net income on your personal tax return, which will be subject to self-employment tax. You'll be taxed each year as you earn the money, not as you pay yourself. Although payments aren't very complicated, single-member LLCs should be careful to maintain a separate business account. LLC members that intermingle personal and business funds can lose limited liability, which means your personal assets are at risk.
Paying yourself in a multi-member LLC is a bit more complex. LLC members can't draw a salary but can receive guaranteed payments. Guaranteed payments are similar to a salary, as they're considered to be payments for services rendered. They're "guaranteed" because the member receives the payment regardless of LLC income for the year. Guaranteed payments are considered earned income by the Internal Revenue Service. The member is responsible for paying self-employment taxes on the guaranteed payment, and the payment is a tax deductible expense to the LLC. To pay yourself through a guaranteed payment, cut yourself a regular check for a predetermined amount from a guaranteed payment expense account.
Another option for multi-member LLCs is owner draws. Just like in a single-member LLC, multi-member LLC members recognize income as the LLC earns it, not as they receive payments. These earnings accumulate in the form of member equity. When the member is ready for a cash payment, the LLC initiates an owner draw that reduces his member equity account. To pay yourself through an owner's draw, cut yourself a check and reduce the balance of your personal LLC member equity account. Since you already paid income taxes when the LLC earned the income, you won't be taxed when you take the owner draw.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.