Key Takeaways

  • A multi-member LLC is typically treated as a partnership for tax purposes, and members are paid through profit distributions or guaranteed payments rather than traditional salaries.
  • Payments depend on LLC structure, the terms of the Operating Agreement, and whether the business elects taxation as a partnership, S corporation, or C corporation.
  • Before members are paid, the LLC must remain adequately capitalized to cover expenses such as payroll, debt, and reinvestment.
  • An Operating Agreement should clearly outline how profits and losses are divided, the timing of distributions, and rules for guaranteed payments.
  • If taxed as an S corporation, members who actively work for the business must receive a reasonable salary before taking additional profit distributions.
  • Guaranteed payments are common in multi-member LLCs because they ensure members are compensated regardless of profitability.
  • Tax treatment varies: distributions are generally subject to self-employment taxes if the LLC is taxed as a partnership, while S corporation distributions may avoid them.
  • Members should maintain separate personal and business accounts and follow IRS guidelines to avoid misclassification of payments.

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?

Methods of Paying Yourself in a Multi-Member LLC

In a multi-member LLC, owners generally cannot simply pay themselves a wage like traditional employees. Instead, the IRS requires that members take compensation in two main ways:

  1. Guaranteed Payments – These are similar to salaries but are not tied to profits. Guaranteed payments are reported as income by the member and deducted as an expense by the LLC. They ensure members are compensated even if the business records a loss.
  2. Profit Distributions – Members can also be paid from the LLC’s net profits. Distributions are divided according to the ownership percentages or terms outlined in the Operating Agreement. These payments are usually subject to self-employment taxes unless the LLC has elected S corporation status.

This flexibility allows members to balance reliable compensation with profit-based earnings, but it requires careful tax planning.

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.

Tax Considerations for Member Payments

How you pay yourself in a multi-member LLC significantly impacts your tax liability:

  • Partnership Taxation (Default): Each member reports their share of profits and losses on their personal tax return using Schedule K-1. These distributions are subject to income and self-employment tax.
  • S Corporation Election: If the LLC elects S corporation status, members who actively work in the business must take a reasonable salary subject to payroll taxes. Any additional profit distributions may be exempt from self-employment tax, creating potential tax savings.
  • C Corporation Election: Members working for the LLC receive wages subject to payroll taxes, and any dividends face double taxation.

Choosing the right tax structure often depends on the LLC’s income level and the members’ financial goals.

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.

Importance of Clear Distribution Rules

An Operating Agreement should address not only ownership percentages but also:

  • How often distributions are made (monthly, quarterly, or annually).
  • Whether guaranteed payments are offered and how they are calculated.
  • Rules for reinvesting profits back into the business before distributions.
  • Procedures for handling losses and how they affect member payouts.

Without clear provisions, disputes may arise when members disagree on timing or amounts of compensation.

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.

Common Mistakes to Avoid

When deciding how to pay yourself in a multi-member LLC, avoid these pitfalls:

  • Mixing personal and business funds, which may weaken liability protection.
  • Failing to set aside taxes on guaranteed payments or profit distributions.
  • Misclassifying payments—for example, treating distributions as tax-free when they should be subject to self-employment taxes.
  • Ignoring “reasonable compensation” rules under S corporation taxation.

Maintaining accurate records and consulting with a tax advisor can help prevent IRS scrutiny.

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.

Frequently Asked Questions

  1. How do I pay myself in a multi-member LLC?
    You are generally paid through guaranteed payments or profit distributions, depending on the LLC’s Operating Agreement and tax election.
  2. Do members of a multi-member LLC get W-2 wages?
    No, unless the LLC elects to be taxed as a corporation. By default, members are not employees but self-employed individuals.
  3. Are profit distributions from a multi-member LLC taxable?
    Yes. They are reported on Schedule K-1 and typically subject to both income and self-employment taxes.
  4. Can a multi-member LLC elect S corporation status?
    Yes. This allows members to take a reasonable salary subject to payroll taxes and additional profit distributions that may avoid self-employment tax.
  5. What happens if the Operating Agreement doesn’t specify payments?
    Default state law applies, usually dividing profits and losses equally among members regardless of capital contributions or effort.

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