There are two types of LLC's - a single owner LLC (called a "single member LLC") and a multiple-owner (multiple-member) LLC.
How Does LLC Membership Work?
In most cases, when you become a member, either when the LLC is formed or later, you will need to contribute money to this account. When you need money, you draw out (take a distribution from) your capital account.
How Do I Take Money From My Capital Account?
When you take money out of your LLC, you are taking money out of your ownership account for the business. This ownership (or equity) is shown in your capital account. The capital account is shown on your business balance sheet.
If you need money for personal living expenses, you take a from your capital account. Sometimes this is called a "distribution" or a "draw." The draw is usually in the form of a check, written to you personally on a business check.
But this check is NOT a paycheck. No federal or state income taxes are withheld from your draw, nor is there any FICA tax (Social Security/Medicare) withheld from your draw. Make sure the draw is paid to you by the business, using the business checking account, and that the draw is deposited into your personal checking account.
Note: Because no money is withheld automatically from your draw, you may need to pay quarterly estimated taxes. Talk to your tax professional.
If you don't have any money in your capital account, you can't draw any money out for personal expenses. For example, if you start a new business and you have little income and lots of money that must be paid out - for rent, equipment, interest on your business loan - there is nothing left to pay you for personal expenses.
Does the Money I Take out Get Taxed?
You (personally and business) don't get taxed on the money you draw out for personal use. Your business tax amount is determined by your portion of the net income or loss from your business for the year.
Just to be clear, if you take out more than the net income, it doesn't increase your income tax liability. If you take out less than the net income, it doesn't decrease your income tax liability.
Single-member LLC Distributions Example
- Monthly profits average $3,000, and annual net income of the LLC is $36,000.
- Single member/owner takes a draw each month, and all draws total $30,000 for the year.
- Net income of $36,000 is calculated on Schedule C.
- Schedule C net income of $36,000 is included in the owner's personal tax return.
Multiple-member LLC Distributions Example
- The LLC member takes a draw of $2000 a month, or $24,000 a year.
- The LLC net income for the year is $50,000. There are two members, each with half of the ownership. So each member's share of the net income (profit) is $25,000.
- The LLC gives the member a Schedule K-1 showing his or her share of net profit at $25,000. The LLC member is taxed on the net profit of $25,000. The draw amount ($24,000 in this year) is not taxed since it's included in the net profit. Note that the member's share of net profit is taxable even if not taken out of the business.
The fact that an LLC member pays income taxes on the profit of the business, even if that profit is not paid out to the individual, is considered a drawback of the LLC business form.
What About Social Security/Medicare Taxes?
Everyone who works in the U.S. pays Social Security/Medicare taxes on their income. You must pay self-employment taxes, which are Social Security/Medicare taxes on the net income (profit) from your LLC business. In the examples above, the single-member LLC owner would pay self-employment tax on $36,000. The multiple-member LLC owner would pay self-employment tax on $25,000 share of income.
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