Knowing whether your business is an LLC, sole proprietorship, or corporation will affect how you take payments and how your taxes work. It's important to mention that if you've never done anything to set up a specific business structure, you're probably considered a sole proprietor. Sole proprietorships, partnerships, S corps, and C corps have different rules about how their owners, members, or shareholders are paid—and taxed. Here are six types of business ownership with their pros and cons.
In the following sections, we will look at the different ways you can pay yourself as a business owner, depending on your business structure.
How do you pay yourself from an LLC
If your business is an LLC, you can pay yourself as the owner in several ways. It all comes down to your underlying tax structure. An LLC can have the following tax structure:
Partnership or sole proprietorship, where you draw cash from profits
Corporation, where you pay yourself a salary (and probably top it up with dividends from profits)
The above means you pay depending on your tax structure - sole proprietor, partner, or corporation.
How to pay yourself as a sole proprietor or partner of your business
As a sole proprietor and partner, you pay yourself simply by withdrawing cash from the business. Those personal withdrawals are counted as profit and taxed at the year's end. Always set aside a percentage of earnings in a separate bank account throughout the year so you have money to pay the tax bill when it's due.
How to pay yourself in an S-Corporation or C-Corporation
Owners of corporations usually pay themselves a salary, which works the same way as with a regular job. The salary will be shown as an expense on the business books, and the owner will pay personal income tax. It's common for owners of smaller corporations to take a modest salary and top it up with dividends from profits.
How much to pay yourself as a business owner?
Defining the amount you pay yourself has to be a balanced amount between what your household requires and what your business needs
What your business needs
It would be best to have enough capital to cover the businesses' essential expenses and rainy day funds and reinvestments. Keep a list of what your business owes and when it's due so you don't draw a lot from the industry at the wrong time. Also, keep some money aside for taxes too.
It's always healthy to save some cash to ride out any business disruptions. A sensible amount should usually cover 30, 45, or 90 days of expenses. Additionally, hold onto some money for any developments and improvements of your business, for example, new work tools, hiring new staff, or even a marketing campaign.
What your household needs
As you probably already know, your household budget must cover daily living expenses and debt repayments, such as mortgages and car loans. Additionally, you must consider any insurance and retirement funds your employer may have managed before you went out on your own. If your finances are not strong enough or you are just not paying yourself, that may put you at a disadvantage when seeking small-business financing.
Invest in business growth to pay yourself
Perhaps your primary concern is not paying yourself a salary – instead, you need funding for your business. Unfortunately, small business owners rarely qualify for bank loans; their application process is complex and demanding, and the requirements- are strict. You may not have the time, know-how, patience, or credit history to qualify for the same financing options designed to meet the needs of big businesses.
One easy way to get the process started is to check if you prequalify for One Park Financial fast working capital programs. One Park is a company focused on helping owners of small and mid-sized businesses access funding. Please fill out our online form to get prequalified in a few minutes.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.