Are You Required to Take a Salary from Your LLC?

Today I want to talk to you about how we're going to get money from your LLC into your personal bank account and if you are required to take salary from your LLC.

Like I said, I want to talk to you about how we get money from your LLC or your corporation or whatever it is that you've chosen as your business entity into your personal bank account. That's the goal. That's what everyone wants to do, right?

All right, so let's get right into it. I've actually got two questions because they kind of go together. The first question is, as an LLC, am I required to take a salary? Can I keep any and all monies in the LLC?

The answer is it depends. Don't you love it when lawyers give answers like it depends? Well, it really depends. Are you truly an LLC or have you actually elected S-corporation status? We've talked about this before. It really depends on whether or not your LLC is just an LLC or whether or not you have elected to be taxed as an S-corporation.

Assuming that you are just truly an LLC, then you can leave all your money in the business. The reason for that is because at the end of the year when you do your tax return, your LLC is going to show income from wherever sources you derive your income from during the year. Then you're going to have to list out all your expenses. You don't have to list your salary as an expense or pay yourself a salary.

The IRS, when you do your tax return, you're going to calculate what's called self-employment tax, which is about 15% of your net income from your business operations, and that's going to be added on as part of your overall tax bill when you do your 1040 at the end of the year. So you don't have to pay yourself a salary.

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Now, if you're an S-corporation, you do have to pay yourself a reasonable salary. Now you can be an LLC and elect to be taxed as an S-corporation, and then you would have to pay yourself what's called a reasonable salary.

So to answer your question, no, you are not required to take a salary when you're a LLC. You can just take draw money out when you want as distributions, but then at the end of the year, you're going to be taxed on all of your net income from the LLC.

The second part of that question was can I keep any and all monies in the LLC? Absolutely you can. That's perfectly fine. You can do that. That's not a problem.

Now, bonus question today. The bonus question today is how does a CEO of a corporation pay themselves $1 a year? That's not a reasonable income. It's more like tax avoidance.

Actually, it's not tax avoidance. The reason why is because most corporations that have CEOs and you hear about CEOs that are making hundreds of millions of dollars, those are C-corporations. C-corporations pay their own taxes, which means that they pay tax on the revenue of the corporation, less the expenses. That's what they're going to pay taxes on. So if a CEO pays himself a $1 salary, they're actually costing the corporation more because the corporation is going to have to pay more in taxes. But what typically they do is they're being paid some other way. They might have stock options that are being granted to them that they will get taxed on later. They may receive stock grants as well. So they probably are doing a lot of differing of their income. By paying themselves a $1 a year salary, that is not actually tax avoidance.

Now, if you are an S-corporation, which is different than a C-corporation, paying yourself $1 a year, that may or may not be reasonable. It really depends on what would somebody who had a job doing what you do, what would they typically get paid? Is the business making money or losing money right now? There's all sorts of different factors that go into play in what is a reasonable income or reasonable salary for an S-corporation.

So just so you know, when you see those CEOs that are taking $1 a year salary, they are not avoiding taxes. That's not what's going on there. That's perfectly legal. Actually what they're doing is they're passing more money on to the shareholders in the form of dividends because there's higher net profits for the business. Now, the business will probably pay more in taxes, but that's okay.

All right, well, that's it for today. Until next time have a great day!.

 

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