How you are paid if you're a member of an LLC (Limited Liability Corporation) depends on a number of factors,:

  • The LLC's structure: is it single or multi-member
  • The LLC's business expenses
  • The business's profitability
  • Reasonable compensation rates

LLC Structures

Limited Liability Corporations are a cross between partnerships and corporations. Like partnerships, each member shares the tax bill and reports company gains and losses on their personal tax return. Like corporations, the business is regarded as a separate legal entity to its owners.

Single-owner LLCs are treated the same as sole proprietorships. If you are the owner, you reports the LLC's income on your personal tax return and are taxed as self-employed. On payday, you receive a distribution from the company's profits and deposit it into your personal checking account.

Any LLC that has more than one member is considered a partnership. As with any partnership, the members are paid out of their share of the company's profits. Each member's tax responsibility shows on their personal tax return.

Members of a multi-member partnerships receive “guaranteed payments.” These resemble salaries but are treated as payments for services. They are “guaranteed” because each member will receive a payment no matter how well the business is performing.

If you are part of a multi-owned LLC there are three things to consider when it comes to getting paid:

  • Is the LLC adequately capitalized?
  • Is the payment method in accordance with the LLC's Operating Agreement?
  • Is the LLC taxed as a partnership or an S-Corporation?

Adequately Capitalized

Consider all the other expenses that need to be covered after everyone is paid, some of which will no doubt include:

  • Employee Benefits
  • Employee Training
  • Inventory, Supplies, and/or Equipment
  • Debt Payments

You must pay your employees. Whatever other expenses need to be covered, including your own pay, employee compensation has to come first. How much you and the other members receive will be determined by the business's profitability and how much is left after you have accounted for all other expenses. If the company's making good money and is able to cover all expenses after employee salaries, then the members can take a larger share of the profits as an income. If the business has been less profitable, members may need to take a pay cut. Whatever the size of the members' pay checks, make sure there is enough left to grow the business and increase its operational efficiency.

Operating Agreements

Every multi-owner LLC should have an Operating Agreement. Among other things, the Operating Agreement details the financial and operational relationship between the members of the LLC. This may include how money is distributed to each owner. The distribution methods will depend on whether there are set proportions, or if a vote is necessary, if there's a payment schedule, and so forth. It is important that the rules are determined in advance, and once agreed upon, the members adhere to it.

C-Corporation vs. S-Corporation

How the LLC is set up will determine how you and your fellow LLC-members are paid, and how the business is taxed. If the LLC is a C-Corporation and you work for the business, you can receive a salary (or a paycheck, or a distribution). If you are simply a shareholder and not actually working for the corporation, you will receive a dividend. Members of LLCs are taxed as employees and pay FICA tax.

One of the hallmarks of a C-Corporation is double taxation. The corporation pays tax and whatever profit the business makes is also taxed through member incomes.

As with C-Corporations, members of S-Corporations receive FICA-deducted salaries if they actively work for the business. The main difference is the S-Corporation is not double-taxed. The “reasonable salaries” members receive can be distributed via payroll, if the members choose, but they are taxed at a different rate.

Reasonable Compensation Rates

When determining how much you should be paid, take into consideration your value to the company. How hard would it be to replace you? Also, compare yourself to others in similar positions doing similar jobs. How much do they make? Ensure this is an apples-to-apples comparison, accounting for business size, location, and industry.

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