How to Pay Yourself in a Single Member LLC (2019 Update)

so today we're gonna talk about one of the most common questions I get from people that are forming LLC's how to pay yourself with an LLC hey my name is Jim harden the founding attorney here at Hawthorne law we help online entrepreneurs and small business owners to get their legal house in order so they can focus on doing what they do best and that's building something that truly matters in the world and today we're going to focus on something that is really important to a lot of you and that is how to get paid with your online business over the past several weeks we've talked a lot about many of the foundational things that you really need to do to get your legal house in order when you're forming your LLC damn it yeah if you can't tell I just spilled my coffee anyway what was I saying so over the past several weeks we've spent a lot of time focusing on many of the foundational elements of forming your LLC this includes choosing the right business entity to begin with switching from a sole proprietorship to an LLC what you need to do to set your LLC up the right way common mistakes people make when setting up their LLC's all those real foundational things that you need to know about when you're starting your LLC so over the next several weeks we're going to transition a little bit from things you need to do when you first start in your LLC to more of the operational things that you need to think about when you have already formed an LLC so basically everything you need to know to operate your LLC properly today's video is going to be the first in a series of maybe four to five videos we're gonna do about the various aspects of operating your LLC alright let's get to it so for some reason a lot of business owners are really somewhat fearful of the idea of paying themselves from their business I'm not sure I completely understand this fear but I think it probably has something to do with the fact that you're scared about doing it wrong or incurring some tax liability that you're not gonna be able to pay or something else I suspect that's the case comment below and let me know if I'm on the right track but I think that's probably right so the way you pay yourself is really gonna vary in large part on the type of business that you have and the entity that you've chosen to run your business in other words as an LLC it's gonna be a little bit different than if you are a sole proprietorship which is going to be a little bit different than if you're an S corporation which is gonna be a little bit different than if you are AC corporation does that make sense I hope so today's video is gonna focus primarily on how to pay yourself if you're running a single-member LLC if you're a multi-member LLC it's gonna be a little bit different that's the subject of another video but today we're gonna talk about a single-member LLC and we're gonna talk about the two different ways that you can pay yourself as a single-member LLC and that's as a disregarded entity on the one hand or an S corporation as far as taxing status on the other so the first method to pay yourself is if you're a just a blanket garden-variety vanilla single-member LLC you've not elected any type of S corporation status and the way to do that is you basically they're gonna write yourself a check we're gonna talk more about that in just a minute the second method is to actually pay yourself what is called a reasonable salary and when you do that you're actually going to withhold payroll taxes fyke state and federal withholding all those types of things will be done because you're gonna actually pay yourself a salary and you're gonna receive a w-2 at the end of the year just like you would if you were an employee for any other business so you do this when you've made an S corporation election for your business and that's because if you've elected to be taxed as an S corporation you have a legal requirement to pay yourself that reasonable salary we just talked about so you're probably wondering what is a reasonable salary that's a great question I'm glad you asked so a reasonable salary is something that it's a term of art that was created by the IRS and it's basically gonna vary depending on the type of business you're in and your role in that business well on a second I think it's time for coffee break I've got a new coffee mug since I'm at home today instead of at the office and the reason I'm doing that by the way I'm sorry for this little brief interjection is because the acoustics were really bad at my office I just wanted to test and see if I did it here if the sound actually was a little bit better so generally speaking what a reasonable salary is it's the amount of money that you would pay yourself if instead of being the owner of the business you were actually the technician doing the work in the business so make sense so for example if you were a law firm like I run a law firm it's the amount of money that I would pay myself if I were a lawyer working at a similarly sized law firm if you are let's say an agency owner it's the amount of money that you pay that graphic designer to do the work of designing graphics for your clients or customers so when you would like to be taxed as an S corporation it does get slightly more complicated and a little bit more confusing when it comes to the payroll aspects of your business and I'm gonna venture to guess and this really isn't that much of a guess I don't think this is that far-fetched that if you elect to be taxed as an S corporation in all likelihood you're going to need to go ahead and hire a bookkeeper or an accountant or a third party agency of some sort service who can help you run payroll for your business I've actually included a link down below to a service that I know and love and that I actually use from my law firm I just want to make sure this is clear if you elect to be taxed as an S corporation under no circumstances unless you have an accounting background and you know how to do these things should you try to do payroll on your own you will will 100% I guarantee mess this up and not only that for like fifty bucks a month you can hire a service that's gonna do all this for you they're gonna file out the forms they're gonna file your quarterly taxes they're gonna deposit the money in your account they're gonna do all these things for you I don't know why you wouldn't do that anyway again link down below to the scription that is an affiliate link if you do decide to move forward with that bender I think I get a free month of service or something nothing major I appreciate it so back to what I was saying at the beginning about paying yourself a check of your single-member LLC for the vast majority of you out there who operate as an LLC you're going to be what's called a disregarded entity which means that you have not yet elected S corporation status or C corporation status or any taxing status for that matter for those of you that fall into this situation you basically can pay yourself whatever you want whenever you want however you want from your business bank account to your personal bank account that means you can write a check that means that you can do an electronic transfer if your bank allows business to personal transfer some do some don't or you can just withdraw cash and deposit in your account the only requirement that you need to be concerned about is to make sure your LLC is properly capitalized so that you don't run the risk of violating an terms for purposes of piercing the corporate veil so let's touch on briefly how much you actually are gonna pay yourself as the owner/operator of your single-member LLC I actually did an entirely separate video on Mike McCalla which is profit first system linked up here and I highly recommend that you watch that video if you're trying to think about how much you need to actually pay yourself but basically here's the general idea for a single-member LLC each month when you get revenue in you're gonna pick a couple days let's say the 10th and the 25th and you're gonna make target allocations so that might be anywhere from thirty to fifty to sixty percent of your revenue is going to go to your owners pay and you're gonna take that amount that percentage from your revenue and you're gonna transfer that into an account for owners pay the remainder or whatever is left is going to be divided up between profits taxes and expenses for the business and you're gonna have separate allocations for each of those and you're gonna transfer the money into a separate account for those categories as well so you're gonna have four accounts owners pay expenses taxes profit and that's how you're gonna pay yourself again I included a link up above to a video I did on this entire system check that out if you want to know more or alternatively you can read the book profit first again link down below to that book from Mike michalowicz it's awesome if you listen to the audible subscription it's actually even better because he's a hilarious guy he's kind of corny like I am but he's way corny if you're looking for a checklist of everything you need to do when you're first starting out with your LLC I've included a link down below to a checklist that you can download it this is a monster guide to starting your online business that talks about everything you need to do and think about as you're just getting started and obviously this is all from a legal perspective so that you can make sure that you've properly protected your online business so if you missed my last video on how to convert your sole proprietorship into an LLC I'll include a link up here not only does this video have a lot of great information on how to convert your sole proprietorship to an LLC it also has a lot of good information on the different things that you need to do when you're starting your LLC just to begin with thanks so much for watching we'll see in the next video

Channel: Hawthorn Law

Views: 121,265

Rating: 4.8964252 out of 5

Keywords: how to pay yourself as a business owner, how to pay yourself llc, owners draw, pay yourself first, single member llc, pay yourself, small business owner, how much to pay yourself, entrepreneur, gusto, single member llc s corp, what's an owners draw, how much to pay yourself small business, starting an llc, how to pay yourself from your business, limited liability company, how to make money, entrepreneur advice, how to pay yourself as a sole proprietor, how to pay yourself, llc

Id: xQuuSRMVWME

Length: 8min 54sec (534 seconds)

Published: Wed May 22 2019