Should I Pay Myself A Salary From My LLC?
When you set up your own business and structure it as an LLC, you protect yourself from any personal responsibility for that LLC’s debts. So what does that mean for you in terms of getting paid? Should you pay yourself a salary from your LLC or seek payment in other ways? Should you wait for repayment of your initial investment through an equity offering? Or, if you do pay yourself a salary, should it be higher than a CEO’s, the same, or lower?
These are questions to ask a startup advisor before establishing your business as an LLC, among others. However, here we explore the advantages and disadvantages of paying yourself a salary from an LLC.
Ways To Pay Yourself From An LLC
Let’s delve into all the ways you can be paid from an LLC. Understanding the options available allows you to make an informed decision about your compensation. Getting your payment structure right is a key way you can help your business succeed. When you get it right, you will find that you are motivated and able to maintain personal financial stability while balancing the needs of the company.
1. Owner’s Draw
An owner’s draw is when you take money from your business’s earnings whenever you feel it is appropriate. Payment does not have to be regular or in a consistent amount. You determine what amount of money is right for you and your business.
2. Salary
A salary is the most common way of earning an income. Paying yourself from your own business, means you will receive a predetermined amount of money on a set schedule. While you can set up that schedule as you wish, it likely will be paid biweekly or monthly, in the same manner as an employee’s salary would be.
3. Dividends
If your LLC is structured correctly, it is possible to supplement your salary with dividend payments. Dividends are taxed at a lower rate than salaries, but that does not mean you can pay yourself entirely in dividends. The IRS is well aware of this method of tax avoidance.
Advantages To Paying Yourself A Salary From Your LLC
The advantages of paying yourself a salary from your LLC extend beyond enjoying a fixed, regular payment. While it’s great for your personal financial budgeting, being paid a salary is also a great way to streamline your business’s financial administration. If properly administered, your income taxes are deducted from each paycheck so you do not have to worry about calculating self-employment taxes or paying quarterly tax estimates as you would have to do if receiving an owner’s draw.
Finally, many prefer taking a salary because it makes keeping tabs on the business’s finances easier. In terms of available capital, it allows owners to know with certainty the inflows and outflows through the business’s capital account. As many business owners claim, cash is king; having a clear idea of cash flow can really help a company be successful.
Disadvantages To Paying Yourself A Salary From Your LLC
One disadvantage of paying yourself a salary is that it is up to you to determine the correct amount. It can be tricky finding the right balance between the correct level of compensation for you versus leaving enough capital in your business for future investments. Furthermore, the higher the salary, the higher your tax burden.
Paying Yourself As A Business Owner
If you find the salary you’re paying yourself isn’t adequate, there are a few additional options. For one, you can give yourself a bonus at the end of the tax year, or even do that quarterly if necessary. You can also adjust your salary on an annual basis according to how successful your company was that year. If you can see that your company’s earnings have increased, then you can increase your salary by an appropriate amount, while leaving the business enough to operate on.
If a salary doesn’t suit your purposes, then you may wish to look at an owner’s draw instead, which may be a better fit for you. It does, however, require more tax planning.