Today we’re setting our sights on a critical yet often misunderstood aspect of owning a Limited Liability Company (LLC): the process involved in how to pay yourself as the owner. Figuring out how to navigate through the labyrinth of owner compensation can indeed feel overwhelming, but there’s no need to worry. We’re here to help guide you. So, let’s untangle this knot together and eliminate any uncertainties that might cloud your entrepreneurial journey.
But before diving in, I want to share with you an important video I created to help you pay yourself as an LLC owner, where I explain the entire process:
How do you get that sweet cash from your business into your personal account? Because it’s kind of a little bit confusing and you’re like, “I don’t want to do something wrong and have some tax problem!,” right?
Table of Contents
Your Role as an LLC Owner
As the proud owner of an LLC, you have the responsibility of managing the day-to-day operations of your company, one aspect of which includes figuring out your own compensation. While traditional employees simply receive a paycheck, as an LLC owner, you have a different route to access your hard-earned money.
An LLC provides flexibility when it comes to income distribution. Most owners typically prefer to pay themselves through an “owner’s draw“. This essentially translates to writing a check from your business account to your personal one. But it’s essential that this is done in a way that is not detrimental to your company’s financial health. To keep accurate records, remember to always denote “owner’s draw” and the date in the memo section of the check.
Delving Deeper: The Owner’s Draw
An owner’s draw is a form of withdrawal from your company’s earnings, specifically for personal use. It’s a route for you, the business owner, to channel some of the business’s profits into your personal account.
As the owner, you have every right to this draw, and it’s an uncomplicated way to move money from your business to your personal holdings. However, as simple as this might sound, it’s vital to remember that this draw affects the balance of your business’s equity and should be taken into consideration during any financial decisions.
Understanding Self-employment Taxes for LLCs
When you choose to pay yourself as an LLC owner through an owner’s draw, there’s an important tax implication to consider: self-employment taxes. As a self-employed individual, you’re liable for these taxes, which are currently set at 15.3%.
The reason for this is because, as an LLC owner, you’re essentially playing the roles of both employer and employee. This is quite different from a traditional employee who has these taxes split with their employer, so it’s crucial to factor this into your financial planning.
You can also cosider other option, such as…
The Case of S Corporation
While we’ve primarily discussed the method of paying yourself from an LLC, as your business expands, there’s another path you might want to consider – the S Corporation. This alternative becomes particularly interesting when your business is regularly netting an income of around $40k – $50k each year.
Although setting up and maintaining an S Corporation carries higher costs, it could potentially save you substantial sums when it comes to tax payments.
Let’s review the differences between an LLC and an S-Corp:
LLC vs. S-Corp
The Appeal of S Corporations
In an S Corporation, you’ll draw a salary instead of taking an owner’s draw. This salary must be “reasonable”, meaning it can’t be absurdly low or exceed your company’s net income. The critical tax benefit of an S Corporation is that you’re only obligated to pay federal income tax on the distribution, not the full 15.3% self-employment tax.
In addition, your salary turns into a tax-deductible business expense. While more complex to set up, an S Corporation can result in considerable savings for successful businesses.
The Right Path for Your Business Journey
Becoming an LLC owner or transitioning to an S Corporation indeed brings an increased level of complexity. But that’s just part of the entrepreneurial game. As you embark on your business adventure, you’ll need to become comfortable with new concepts like payroll, tax implications, liability, and much more. But remember, every new challenge you tackle, every complexity you decipher, brings you one step closer to the peak of entrepreneurial success.
Being an entrepreneur is about more than just setting up shop and selling goods or services. It’s about understanding the ins and outs of the business world, and more importantly, it’s about constant learning and growth.
Understanding how to pay yourself as an LLC is a crucial part of that journey. As your business expands, don’t be afraid to explore different structures and tax strategies to find the most beneficial fit for you.
Above all, remember, the journey may be complex, but you’re not alone. We’re here, cheering you on every step of the way, illuminating the path towards a rewarding and prosperous future. In the following article, we’ll delve into some great resources that will help simplify your entrepreneurial journey. Stay tuned!