If you’re a self-employed individual who works alone, the single-member LLC (limited liability company) is a great alternative to the sole proprietorship.
With a single-member LLC, you can shield yourself from lawsuits with personal asset protection, and you can also benefit from the heightened professionalism that comes with a formal business structure.
One of the questions we often hear from single-member LLC owners is how you’re supposed to pay yourself. After all, as an LLC owner, you need to keep your business and personal finances strictly separated, so it makes sense that some people aren’t quite sure how they should pay themselves while still maintaining the corporate veil.
In this guide, we’ll discuss the best ways to pay yourself from your single-member LLC, while still maintaining your LLC’s personal asset protection.
What Is a Single-Member LLC?
To begin with, let’s quickly break down what the single-member LLC is. When it comes to ease of operation, the sole proprietorship can’t be beat. There’s no formal process to create one with the government, and no fees to be paid, so all you need to do is get to work. There’s a lot to like about this setup, but the sole proprietorship lacks some important benefits that you can only get with a formal business structure.
As we alluded to in the introduction, the single-member LLC’s most important function is providing limited liability protection. This means that if your business is sued, it keeps creditors from pursuing personal assets like your car, house, bank accounts, etc. They will be limited to business assets specifically related to the company itself, such as your business bank accounts and office equipment.
By forming a single-member LLC, you’re establishing the business as a separate entity from you as an individual with distinct assets and operations, taking any business-related liabilities off of yourself. You can either form it yourself or by hiring a cheap LLC service.
How Do I Pay Myself From a Single-Member LLC?
When it comes time to cut yourself a paycheck, you’ll need to do it in a way that preserves your personal liability protection. Otherwise, why did you bother forming the single-member LLC in the first place?
Especially in the early days of a business, you might not have much money coming in. But once you do receive an influx of cash, many entrepreneurs aren’t quite sure how they’re supposed to transfer those business funds into their personal accounts. In our experience, the best way to go about this is to pay yourself a regular salary, or a percentage of your LLC’s income.
For a young, growing LLC, it usually makes the most sense to pay yourself a percentage of your business income, while investing the rest of it back into your business. For example, let’s say you invest half of your income into growing your company, while paying yourself the other half.
Once you’ve reached a point where the business is generating a solid amount of income, you’ll probably want to shift to a salary model. This way, you have a consistent personal income stream, while also providing your business with plenty of funds to spur growth.
As for making sure you’re paying yourself in a way that maintains your single-member LLC’s compliant status, the main thing you’ll need to focus on is making sure you’re not overpaying yourself. If you do, this is an easy way for a court to say that your business is not a separate entity from you as a person, which could lead to having your personal asset protection revoked.
Thankfully, this situation is rather easily avoided. All you need to do is figure out what the industry norms are for your job, and make sure you don’t exceed those limits. In addition to your salary, you are also allowed to pay yourself bonuses, but again, these need to be reasonable if you don’t want any trouble with the Internal Revenue Service.
The process of paying yourself from a single-member LLC isn’t too terribly complicated. In general, you just need to focus on paying yourself enough to pay your bills without too much trouble, while also making sure you aren’t overpaying yourself in a way that would raise any eyebrows at the IRS.
Whether you pay yourself a percentage of your business income or a regular salary, we recommend researching what your job typically pays. For example, if you’re a web designer who codes websites for business clients, it shouldn’t be difficult to find out what an average salary is for this role.
We hope this article helped you get a better grasp on how you should pay yourself from a single-member LLC!