paying yourself in an LLC

by Mike
(baltimore, MD)

When paying myself in my LLC, can i simply make online transfers to my personal checking account?
If so, how often will you recommend i do this throughout the course of the year.
Also, what if I want to put money into the checking account of the LLC for whatever reason...Anything I need to know in terms of how the IRS see's this? My concern is the IRS and making sure i don't get into any trouble on both questions.
Your site has been a blessing....
Thank you.

Answer

A blessing. Thank you very much for the compliment.

I get a TON of questions about how money should flow between the owner of an LLC and the LLC itself.

Let's start with the overall picture, from 30,000 feet up. A limited liability company and its owner are two separate entities. Just like you and your neighbor are two separate entities. Just like you and you employer are two separate entities.

Veil piercing, and the IRS "problems", you alluded to, occur when you, as owner of an LLC, ignore this foundational truth and treat your LLC's bank account like your own.

Now, it's true that all the profit of the LLC belongs to its members (and if you're the sole member of a single member limited liability company, then all the profits belong to you). And yet, there are still formalities that must be followed to respect the separate existence of you and the company.

Putting Money In Your LLC
Whenever you put money in the limited liability company, you must explain what that money "is".

Is it a loan?
Is it a capital contribution?

If it's a loan, you will need a simple promissory note, executed by the limited liability company, promising to repay the loan. Yes, I know that YOU are the only member of the llc, so why sign a note to yourself? Because your LLC is not the same as you, even though you control it.

This is a strange concept, I understand, but just think of your LLC the way you think of your employer.

Would you write a check to your employer, to be repaid at a later date by them, without some written document? Of course not.

Same with your limited liability company.

Taking Out Your Profits

As a member of a limited liability company, you are entitled to withdraw your profits at any time, in any amount, in any number of transactions.

And you should, since you'll be paying taxes on your LLC's profits whether you take a distribution of profits or not.

Furthermore, understand that you must pay quarterly estimated taxes. This is not unique to being a member of an LLC--every taxpayer must make quarterly estimated taxes.

As an employee, your employer withholds quarterly estimated taxes for you from each paycheck.

As a business owner--whether LLC, sole proprietor, s or c corporation, or partnership--you must make quarterly estimated payments yourself.

See IRS FORM 1040-ES to calculate your estimated tax payments.

You might want to take out enough of your profits each month so that it adds up to enough to pay your quarterly estimated taxes, and then withdraw the remainder at the end of the year. This will require careful budgeting, however.

The other method is to withdraw your profits in equal monthly installments.

If your business is seasonal, you might want to make other arrangements, taking less in the good months and more in the slow ones.