When you start a business, one of the most important decisions is choosing the right structure for your company—whether that’s an LLC or a corporation. One key difference between these business types is how you, as an owner, get paid. Understanding each payroll rule can help you manage your income effectively and avoid tax complications.
How Owners Get Paid in an LLC
In a Limited Liability Company (LLC), how you pay yourself depends on how the LLC is taxed. By default, single-member LLCs are treated as sole proprietorships, while multi-member LLCs are treated as partnerships. In either case, owners are typically paid through what’s called an owner’s draw, rather than a formal salary.
An owner’s draw is a method of taking money out of the business’s profits for personal use. You won’t need to set yourself up on payroll, but it’s important to track these draws accurately for tax purposes. All earnings “pass through” to the owners, meaning you report the income on your personal tax return. Remember that you’ll need to make quarterly estimated tax payments, as no payroll taxes are withheld from an owner’s draw.
However, if your LLC is taxed as an S-Corp, things change. In this case, you’ll need to pay yourself a reasonable salary through payroll and withhold payroll taxes, just as you would with a corporation.
How Owners Get Paid in a Corporation
In a corporation (either a C-Corp or S-Corp), the owners or shareholders must be paid a salary. Unlike LLCs, you cannot simply take a draw. This means that you, as an owner, will need to set yourself up on payroll, and the corporation will be responsible for withholding federal and state payroll taxes. For an S-Corp, owners can receive both a salary and dividends, but the salary must be considered “reasonable” to avoid IRS scrutiny.
The advantage of paying yourself through payroll in a corporation is that your income taxes and payroll taxes are automatically withheld, and your payroll costs are a deductible expense that lowers your net income. However, payroll management can be more complex in a corporation, requiring accurate records and potentially additional support, like professional bookkeeping for small businesses.
Making the Right Choice
Whether you’re an LLC or a corporation, it’s important to choose the right payment structure for your business. Each option has its tax implications and administrative responsibilities, so it’s a good idea to consult with a financial professional to determine what’s best for you.
If you need help with making this decision, setting up your payroll or bookkeeping for small business, reach out to us to ensure you’re managing your payments efficiently and in compliance with tax laws.