Pay Yourself Owner LLC: What business owners need to think about when starting a new economic venture & how to best figure out how to pay oneself.
When you’re just starting to devise a business plan, it can be easy to fall under the assumption that your pay as the owner of the company will consist of all the profit. On the surface, you would think that paying yourself would be as easy as collecting your revenue, paying your employees and expenses, and keeping whatever is left. Seems simple, right? However, once you get into the process of researching your accounting and tax-related administrative duties, it becomes clear that you’ll need to set aside your personal income in a separate account instead of spending money on yourself directly from the company’s bank account.
If you decide the Limited Liability Corporation (LLC) company structure is right for you, here are the steps to take in order to correctly pay yourself as the owner of an LLC.
1. Owner’s Draw vs. Salary
There are two main ways to pay yourself as a business owner – owner’s draw and salary. Generally, the salary option is recommended for the owners of C corps and S corps, while taking an owner’s draw is usually a better option for LLC owners, sole proprietorships, and partnerships. This is because the owners of those entities are considered self-employed for tax filing purposes, so they shouldn’t be paid through a conventional wage system. If you wanted the option of taking an owner’s draw alongside a set salary, you’d need to incorporate as an S corp, which would come with a few additional tax obligations and liabilities that aren’t faced by LLC owners.
2. Determine How Much You Should Pay Yourself
In terms of deciding how much to pay yourself, this is entirely up to you, but it’s best to base this number on your profit & loss statements instead of just taking as much as you’d like out of the overall revenue. The wisest approach is to pay yourself a reasonable amount, leaving enough to cover the cost of doing business and to re-invest into marketing, expansion, and development. Thus, choosing a suitable amount to pay yourself will involve keeping a detailed budget of every expenditure and prospective investment.
3. Choose a Payroll Schedule
Choosing a payroll is another factor that is completely up to your discretion. Most states have requirements in place about how long you can wait between pay periods. In other words, you could hypothetically pay yourself with an owner’s draw on a daily basis, but you can’t wait longer than the maximum amount of days allowed between pay periods by your state. For accounting purposes and simplicity, it’s best to just pay yourself every week, every 2 weeks, or once a month.
Write Yourself a Business Check and Deposit it Into Your Personal Account as Income
Finally, to actually facilitate the process of making an owner’s withdrawal, all you’ll need to do is either write yourself a check for the amount using the company checkbook, or send a direct deposit to your personal bank account. It’s also wise to include a note along with the transfer and keep a thorough accounting record of all payments you’ve sent to yourself.