When a business owner pays themselves from their Limited Liability Company (LLC), the term used to describe this process can vary depending on the context and the business structure.

Here are common terms associated with payments to owners in different scenarios…

• Draw or Owner’s Draw
  • In a sole proprietorship or a single-member LLC, the owner may take what is commonly referred to as a “draw” or “owner’s draw.” This is a withdrawal of funds from the business for personal use. It is not considered salary or wages and is not subject to payroll taxes.
• Owner’s Distribution
  • In a multi-member LLC or a partnership, when owners take money out of the business, it is often referred to as an “owner’s distribution.” Similar to a draw, this represents a share of the business profits that is distributed to the owners.
• Salary or Wages (for S Corporations)
  • If the LLC has elected to be taxed as an S corporation, the owner may receive compensation in the form of salary or wages for services rendered to the business. In this case, the owner would receive a regular paycheck and be subject to payroll taxes.

Recall the tax implications associated with these terms

• Draws and distributions are generally not subject to payroll taxes (Social Security and Medicare taxes). Instead, the owner reports business income and pays self-employment taxes on the net income of the business.
• Salary or wages paid to an owner in an S corporation are subject to payroll taxes, including Social Security and Medicare taxes.

Business owners should work closely with their accountants or tax professionals to ensure that they are taking distributions or compensation in a manner that aligns with their business structure and complies with tax regulations. Keeping clear records of these transactions is crucial for accurate financial reporting and compliance.