Q: What’s a Single-Member LLC? How Do I Pay Myself as the Owner of One?

A single-member limited liability company (LLC) is a type of business structure that’s an alternative to being a sole proprietorship.

If you choose to be a sole proprietorship, you don’t have to do anything other than work for yourself. There are no fees or rules to become one (though there are requirements if you decide to hire employees). Because you and your business are treated as one and the same, the downside is the personal liability—as in, your personal assets are at risk if your business runs into financial trouble.

Alternatively, if you want some more protection, you might choose to form a single-member LLC, which is an LLC with one owner. (A multi-member LLC is another type of LLC that has more than one owner who are members of the LLC.)

You get to have “LLC” in your business name, and as the name states, it protects your personal assets and limits your liability against lawsuits and creditors. But those benefits come with a downside: LLCs have to pay to be registered with your state, are subject to governing laws, and may have to pay annual registration fees.

Depending on your needs as an entrepreneur or independent contractor, you may want to seek legal advice and guidance from an accountant to determine which business entity is the best choice for you. Considerations include managing your business income, any distributions, and your business expenses, alongside evaluating reasonable compensation, whether you need guaranteed payments or not, what your tax rate is and what your tax savings could be, as well as what type of business you engage in with how much legal protection you require.

How do I pay myself from my LLC?

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As the owner of an LLC, you don’t get paid a salary or wages.

Instead, you pay yourself by taking money out of the LLC’s profits as needed.

That’s called an owner’s draw. You can simply write yourself a check or transfer the money for your business profits from your LLC’s business bank account to your personal bank account. Easy as that!

How am I taxed as the owner of a single-member LLC?

The IRS treats single-member LLCs as sole proprietorships by default, which means for tax purposes, your LLC will been seen as a “disregarded entity.” Instead of the LLC paying income tax, its profits and losses are passed on to you, the small business owner, making disregarded entities also pass-through entities.

In other words, you may consider it a bookkeeping tax benefit that you don’t need to file a separate tax return for the LLC as the sole proprietor, since you’ll report all of your LLC income on your individual tax return. Your state, however, may have tax filing requirements for LLCs, so make sure to check your state’s rules.

If you prefer, you can choose for your LLC to be taxed as a corporation, either a S corporation (S corp) or C corporation (C corp). If you do that, you’ll be considered an employee, not a LLC owner, and you may be required to pay yourself a reasonable salary with payroll taxes taken out. 

Taking that route can reduce your self-employment taxes (i.e., Medicare and Social Security taxes), but it can also result in more paperwork at tax time and may require other tax payments, so be sure to talk through the pros and cons with your certified public accountant (CPA) or tax professional first.