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Business owners often wonder how they should handle paying themselves. The subject of how to pay yourself from an S corporation, sole proprietorship, or other business structure may arise depending on your business’s organizational structure.
Your salary and tax obligations will be calculated differently depending on your company’s legal structure. Hire Phoenix bookkeeping professionals to help determine what will work best for you.
Limited Liability Company Subtypes
Many different LLC structures exist, and various tax implications should be considered.
There is just one owner (member) in a single-member limited liability company, and the business income is reported on the owner’s personal tax return on Schedule C. Regarding taxation, your company is treated the same as if you were filing as a sole proprietor.
LLCs with several owners (members) file their tax information like a partnership. A K-1 is issued to each owner at the end of the year, detailing their portion of the company’s earnings.
LLCs can file their taxes as a corporation (either a S corp or a C corp) and follow the procedures for filing a corporate tax return. For tax purposes, C corporations are subject to corporate taxation. Owners of S corporations are subject to individual income taxation on their distributive portion of the company’s net earnings because S firms are pass-through entities.
When Forming an LLC, What Type of Organizational Structure Should You Use?
The number of owners and the owner’s financial situation is two major factors to consider while deciding on the best LLC structure. The sole proprietorship and the corporation are the only two viable taxation options for a single-member LLC. For tax purposes, an LLC with several members must elect to be treated as either a partnership or a corporation.
A multi-member limited liability company (LLC) has all the tax advantages of a partnership and the personal asset protection of a corporation.
With an LLC, how much money can you afford to pay yourself?
It’s important to consider the sort of LLC you’re working for, the company’s profitability, and your own financial requirements when determining your wage.
Taking compensation might not be essential (or even practicable) if your single-member LLC is not very profitable. Profits from a multi-member LLC must be distributed among the members.
You must also consider your own individual budgetary requirements. The ability to get by on a lower salary may be possible in places with a low cost of living. It’s important to compensate fairly, especially if your costs are significant.
In the end, there isn’t just one solution to this problem. Factors unique to your company and your life should inform how much you decide to pay yourself.
