How Does an LLC Owner Get Paid?

person filling in paycheck
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The limited liability company (LLC) is a peculiar form of business type and a recent addition to the types of businesses. The LLC owners are called members. Each member is paid from the business as an owner, not as an employee. There are two types of LLC's - a single owner LLC (called a single-member LLC) and a multiple-owner (multiple-member) LLC.

How LLC Ownership Works

As a member of an LLC, either a single member or one of the multiple members in the business, you are a business owner, not an employee of your company. When you form an LLC, each owner puts in something of value, usually money, so each member has ownership in the business.

Each owner's part of the total is their capital account, A capital account shows the changes in their ownership of the business. It's included as part of owner's equity on the business balance sheet). Your capital account starts with your investment, increases with business income, and decreases from business losses and withdrawals by the owner for personal use. 

When you become a member of an LLC, either when the LLC is formed or later, you will need to contribute money to this account.

Here's an example: Kati and her brother Karl are co-owners of an LLC. They have both put in $20,000 to get the business started. On the startup balance sheet, their capital accounts look like this.

Kati and Karl LLC as of July 1, 2020
Assets   Liabilities and Owner Equity  
    Cash  $40,000    Liabilities $0
       Owner's Equity  
            Kati, Capital Account   $20,000
            Karl, Capital Account   $20,000
Total Assets $40,000 Total Liabilities and Owner Equity   $40,000

Taking Money From Your Business

When you take money out of your LLC, you are taking money out of your capital account. Sometimes this is called a distribution or a draw. The draw is usually in the form of a check, written to you personally on a business check.

But this check is NOT a paycheck. No federal or state income taxes are withheld from your draw, nor is there any FICA tax (Social Security/Medicare) withheld from your draw.

Although it shows that the money goes out of your capital account, it's really coming from your cash, the money in your business bank account. If you don't have the money in your business bank account, you can't take it out to write yourself a check!

To continue the example, let's say Kari wants to take out $2,000 to pay her rent and some personal bills and Karl wants to take out $1,500. Now their balance sheet would look like this:

Kari and Karl LLC as of August 1, 2020
Assets   Liabilities and Owner Equity  
    Cash  $36,500    Liabilities $0
       Owner Equity  
          Kari, Capital Account $18,000
          Karl, Capital Account $18,500
Total Assets $36,500  Total Liabilities and Owner Equity $36,500
Note how the cash account has decreased. It's less cash in the checking account.

How an LLC is Taxed

A single-member LLC pays taxes by filing a Schedule C report that calculates the net income of the business (income minus deductions, credits, and other items). The net income shown on Schedule C is added to the person's other income on their tax return (Form 1040 or 1040-SR) to figure their total income and tax liability for the year.

LLCs with multiple members pay taxes like a partnership. The total net income for the partnership is calculated on Form 1065. Then, the individual partners receive a statement called a Schedule K-1 that shows their share of the income or loss for the year. The Schedule K-1 information is added to the person's other income on their tax return to figure their total income and tax liability for the year.

No Taxes on Distribution

You don't get taxed on the money you draw out for personal use. Your business tax amount is determined by your portion of the net income or loss from your business for the year as shown on your income tax return.

For Kari and Karl LLC, at the end of 2020, their net profit is $28,000. They took out a total of $15,000 from their capital accounts. They are each taxed on their share of the $28,000, not on the $15,000.

The fact that an LLC member pays income taxes on the profit of the business, even if that profit is not paid out to the individual, is considered a drawback of the LLC business form. To avoid this issue, some LLCs elect to be taxed as a corporation or S corporation.

Don't Forget Social Security/Medicare Taxes

Everyone who works in the U.S. pays Social Security/Medicare taxes on their income; for business owners, these are called self-employment taxes. Social Security/Medicare taxes are paid on the net income (profit) from your LLC business.

Because nothing is withheld from you draw as an LLC member, you may have to pay quarterly estimated taxes. The amount of these taxes includes your estimate of the net income of the business plus any self-employment tax on that income.

Don't estimate based on what you took out of the business during the year. Remember that amount isn't taxed.

Article Sources

  1. Cornell Legal Information Institute. "Capital Account." Accessed June 5, 2020.

  2. Rasmussen College. "30 Basic Accounting Terms, Acronyms, and Abbreviations Students Should Know." Accessed June 5, 2020.

  3. IRS. "Single Member Limited Liability Companies." Accessed June 5, 2020.

  4. IRS. "LLC Filing as a Corporation or Partnership." Accessed June 5, 2020.