Do I have to pay myself from my LLC?
Starting a Limited Liability Company (LLC) is a significant step in entrepreneurship, offering numerous benefits such as personal asset protection and flexible tax treatment. However, one of the most common questions new LLC owners face is whether they are required to pay themselves from their LLC. The answer to this question depends on several factors, including the nature of your business, your financial situation, and legal requirements.
Understanding the Structure of an LLC
An LLC is a business structure that combines the limited liability protection of a corporation with the flexibility of a partnership or sole proprietorship. As an LLC owner, you are not an employee of the company; instead, you are a member. This distinction is crucial when it comes to paying yourself from your LLC.
Compensation vs. Distributions
When you pay yourself from your LLC, you have two primary options: compensation and distributions. Compensation is similar to an employee’s salary and is typically paid to you for the work you perform for the LLC. Distributions, on the other hand, are profits distributed to members based on their ownership percentage.
Compensation
If you are actively working for your LLC, you may need to pay yourself a salary. This compensation should be reasonable and comparable to what you would earn in a similar role within your industry. It’s essential to document your work and pay yourself accordingly. Remember that any salary you pay yourself is considered an expense for the LLC and is deductible on your personal income tax return.
Distributions
If you are not actively working for your LLC, or if your business is not profitable, you may still receive distributions. Distributions are not subject to employment taxes, but they are taxed as personal income. It’s important to understand that distributions are not deductible business expenses.
Legal and Tax Implications
While you are not legally required to pay yourself from your LLC, failing to do so can have tax implications. If you are a member of an LLC and you do not receive distributions, the IRS may consider you an employee and assess employment taxes on any earnings. Additionally, failing to pay yourself can raise questions about the legitimacy of your LLC.
Conclusion
In conclusion, whether you have to pay yourself from your LLC depends on your business needs and financial situation. While you are not legally required to pay yourself, it’s essential to understand the differences between compensation and distributions, as well as the tax implications of each. As an LLC owner, it’s crucial to consult with a tax professional or legal advisor to ensure you are in compliance with all applicable laws and regulations.
