How to pay yourself as LLC or business owner

Paying yourself as a business owner or partner in a limited liability company (llc) depends on the structure of your business, the growth stage of your business presently and other several factors associated with your business.

While the ability to pay yourself as a business owner or llc may not necessarily be the first thing on your mind when starting up a business, making sure you know the business factors to put into consideration and using the correct payment system for initiating the financial transactions can set you for success as your startup grows.

Ways to pay yourself

Two ways are main when it comes to paying yourself as a business owner which are the owner’s draw or salary

1. Owner’s draw: Drawing money as an owner means you draw out money which can be in either cash or kind from the business profits based on your personal financial needs. This is not limited in any way as you can draw up to the amount you put into the company as financial investments since it’s a liability on the business and known as owner’s equity. The upfront payments of taxes anytime you make a draw may not be at all time necessary but there is a need for you to set aside some resources or money to clear your tax bills. Your draw will be dependent on the business performance of your company.

2. Salary: This deals with paying yourself as an employee of the company with no special or preferential treatment or allocation. It has to do with paying yourself a regular salary like an employee while withholding taxes from your paycheck. This is required legally for businesses or startups that are structured as a limited liability company taxed as a corporation. The salary you are earning should be comparable with that of someone with the same job role in the company or business industry. The disadvantage of this is that your salary has to follow the rule of reasonable compensable even when the business is bad and not running successfully.

Other methods of paying yourself involve dividends and distribution however this is dependent on the structure of the business.

Factors that determine how to pay yourself

There are factors that determine how to pay yourself and among these factors are the following

1. Business structure

The structure of your business will help to determine how much you pay yourself and the method of payment. The structure of your business may revolve around sole proprietorship, partnership, limited liability companies. For instance, you can take an owner’s draw from the business structures above and take a salary when it’s a taxed corporation or LLC. An accountant who is chartered and competent enough to run financial analysis can take you through the tax requirements and advantages of your adopted business structure.

2.  Business stage

 A good entrepreneur or business owner doesn’t immediately pay himself pr herself as soon as the business kicks off, established and is in the early stage. The self-payment activities can be carried out as soon as the business start having its cashflow in a good and balanced mode. Make sure you start to think about paying yourself have a firmer ground to factor the money into the business operating expenses.

3. Personal finances

The amount you set for payment and the payment method you are using should cover all your personal financial obligations such as mortgages, basic expenses and loans. Having weak finances or not paying yourself will put you at a disadvantage.

How much should you pay yourself as a business owner?

One rule of thumb is that you should always pay yourself a fixed percentage of the business net profit so that your payment can always adjust itself with the business performance.

Mistakes to avoid while paying yourself

Mixing business and personal finances

Not paying yourself or lack of consistency about self-payments

Not budgeting for taxes

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