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Can You Pay Yourself Whatever You Want From An LLC?

As an owner of a Limited Liability Company (LLC), you generally have flexibility in how you pay yourself, but there are important considerations to keep in mind…

  1. Operating Agreement – The operating agreement of the LLC typically outlines how profits will be distributed among the owners (members). This agreement may specify the method and frequency of owner distributions, including whether members will receive regular salaries, periodic distributions, or a share of profits based on ownership percentage.
  2. Reasonable Compensation – If you choose to pay yourself a salary from the LLC, it should be reasonable and commensurate with the services you provide to the business. The IRS expects LLC owners who actively participate in the management or operation of the business to receive reasonable compensation for their services. Paying yourself an unreasonably low salary to minimize payroll taxes may attract IRS scrutiny.
  3. Tax Implications – How you pay yourself from the LLC can have tax implications. If you receive a salary, it will be subject to payroll taxes, including Social Security and Medicare taxes. If you receive distributions of profits, they are generally not subject to payroll taxes but may be subject to income taxes at your individual tax rate.
  4. Personal Liability Protection – LLC owners are typically shielded from personal liability for the debts and obligations of the business. However, paying yourself an excessive amount or commingling personal and business finances could potentially jeopardize this liability protection, especially in the event of legal disputes or bankruptcy.
  5. State Regulations – Some states may have specific regulations or requirements regarding owner compensation from LLCs. It’s essential to understand the laws and regulations of the state where your LLC is registered and operating.
  6. Consistency – Consistency in how you pay yourself and how distributions are made among LLC members can help maintain transparency and clarity in the operation of the business.
  7. Consultation – It’s advisable to consult with a tax professional, accountant, or legal advisor when determining the best approach to paying yourself from an LLC. They can provide guidance based on your specific circumstances, help you understand the tax implications, and ensure compliance with applicable laws and regulations.

While there is flexibility in how you pay yourself from an LLC, it’s essential to consider factors such as reasonableness, tax implications, legal requirements, and consistency in distribution methods. Consulting with professionals can help you make informed decisions that align with your business goals and comply with relevant regulations.