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What Is It Called When You Pay Yourself From LLC?

What Is It Called When You Pay Yourself From LLC?

When you pay yourself from an LLC (Limited Liability Company), the specific terminology and method can vary depending on the context and how you have structured your compensation.

Here are some common terms and methods used for paying yourself from an LLC:

  1. Owner’s Draw or Distribution: This is a common method where LLC members (owners) take money out of the business for their personal use. The funds withdrawn as an owner’s draw or distribution are considered a distribution of profits rather than wages or salary. This approach is often used by single-member LLCs and multi-member LLCs.
  2. Salary: In some situations, LLC members may also work as employees of the LLC and receive regular salaries for their services. If you pay yourself a salary, you should follow standard payroll procedures, including withholding income and payroll taxes, and provide yourself with a W-2 form if you are considered an employee for tax purposes.
  3. Guaranteed Payments: In multi-member LLCs, especially when some members are actively involved in the day-to-day operations while others are passive investors, the active members may receive “guaranteed payments” for their services. These payments are akin to salaries but are typically based on a fixed amount or a percentage of profits.
  4. Reimbursements: If you incur legitimate business expenses on behalf of the LLC, you can be reimbursed for these expenses from the LLC’s funds. Proper documentation with receipts and records is crucial for reimbursement.
  5. Capital Distributions: When the LLC generates profits and decides to distribute those profits to its members, this is often referred to as a capital distribution. Members can then choose to reinvest these distributions back into the business or take them as personal income.
  6. Dividends (if taxed as an S Corporation): If your LLC has elected to be treated as an S Corporation for tax purposes, members may receive distributions in the form of dividends based on their ownership shares.

The terminology and methods used for paying yourself from an LLC can vary based on factors such as the LLC’s operating agreement, the state’s laws where the LLC is registered, and the tax treatment chosen for the LLC (e.g., single-member LLC, partnership, or corporate tax election). Proper documentation and compliance with tax laws are essential when paying yourself from an LLC to ensure accurate accounting and tax reporting.

Consulting with an accountant or tax professional with expertise in small business taxation and LLCs is advisable to determine the best approach for paying yourself and to ensure you are meeting all legal and tax requirements.