How to Take Disbursements from an LLC
You own an LLC, and it's finally making money. As an owner, you want to take some out. The way you receive disbursements from your LLC depends upon the business structure you chose when you became an LLC. A Single-Member LLC typically operates as a Sole Proprietor, while a Multi-Member LLC usually is a partnership. However, either can choose to be taxed as a corporation by filing Form 8832 or Form 2553 with the Internal Revenue Service. The choice is yours, and your choice determines how you can get your money out.
Write your check in the net dollar amount you want, if your Single-Member LLC is taxed as a Sole Proprietor or if your Multi-Member LLC is taxed as a Partnership. These checks are considered "Draws" from your company, and are not subject to tax withholding. If, however, these payments from your partnership LLC must be considered guaranteed payments, they require special treatment.
Process a payroll check for your reasonable compensation, if your Single-Member LLC or your Multi-Member LLC is taxed as a corporation. These checks are subject to tax withholding as an employee. As long as you have basis in your LLC, you may also take some money out as dividend distributions. Make sure such distributions do not exceed an appropriate percentage of total monies withdrawn.
Calculate expense reimbursements for out-of-pocket business expenses or business mileage and write yourself the reimbursement check. These are not considered draws or payroll checks as long as they are for legitimate business expenses. Maintain the receipts or mileage logs for these expenses to substantiate them for income tax, and other legitimate, purposes.
Tip
Process appropriate payroll tax reports, if your LLC is taxed as a corporation and your checks are considered payroll checks subject to withholding. These payroll reports include IRS Forms 941 and 940, applicable state withholding returns, and applicable state unemployment tax returns, as well as W2 wage reporting at year-end. Consult an accountant or tax professional concerning possible fringe benefits that you might take as well.
Warning
Be careful about taking dividend distributions from your LLC that's taxed as a corporation. Two things you must keep in mind are making sure you have basis in your LLC in order to take distributions, and making sure you pay yourself reasonable compensation for your work for the company. An accountant or tax professional can help ensure that your total disbursements do not exceed appropriate percentages for dividend distributions and reasonable compensation. No disbursements to owners of any LLC's are ever to be considered as 1099 payments.