What is the best way to get the money out of the LLC and into my pocket?
August 7, 2005 10:52 PM Subscribe
I have an LLC that I never expected would start making money, and (yay!) now it is. What is the best way to get the money out of the LLC and into my pocket?
The LLC is registered in the state of Colorado, with me as the "registered agent". In the eyes of the IRS, however, it is registered as a corporation (not a partnership) and they expect the 1120 every year. Well, the LLC has been around for three years and was always a loss of about $1000/yr.. except this year, money is coming in. Do I need to setup all the employee stuff (SSI, withholding licenses, etc) to pay myself or can I just take money from the biz since I am the 'owner'? What are other options? What are the pros and cons of each?
The LLC is registered in the state of Colorado, with me as the "registered agent". In the eyes of the IRS, however, it is registered as a corporation (not a partnership) and they expect the 1120 every year. Well, the LLC has been around for three years and was always a loss of about $1000/yr.. except this year, money is coming in. Do I need to setup all the employee stuff (SSI, withholding licenses, etc) to pay myself or can I just take money from the biz since I am the 'owner'? What are other options? What are the pros and cons of each?
You can either pay yourself like an employee, or you can pay out a dividend to your shareholders (hey, that's you!). Or you can do a combination of both. Which road is the best to take really depends mostly on the rest of your financial picture, since the tax ramifications are different. So this is something you'll want to discuss with whomever does your taxes. And if you've been doing your taxes yourself up until now, this would be an excellent time and an excellent reason to hire a pro.
posted by spilon at 7:16 AM on August 8, 2005
posted by spilon at 7:16 AM on August 8, 2005
I am not an accountant, and you should consult one. That said, this is my understanding:
An LLC can be taxed either as a corporation (like a C corp) and pay you a salary/dividends, or its revenues can simply flow through to your personal return (like an S corp). Your choice, and it looks like you already picked option 1, but the second option is usually better. The LLC's income appears on Form 1040 Schedule C and you pay both the employee's and the employer's portion of FICA on Schedule SE (you get to deduct the employer's portion, however, since it is a business expense).
The exception is if the LLC is not paying you a salary but giving you perks (say the company owns a jet and, as its CEO, it lets you fly anywhere you want for free, and that's all the compensation you want). Then it's better to have the LLC pay corporate taxes.
If you had been using flow-through all along, you could have written off the past years' losses against your personal return, which probably would have been more beneficial to you than reporting a corporate loss. It may be possible to amend your past filings and use your past losses to offset some of your income this year, but I wouldn't bet on it.
Again, you definitely need to ask an accountant about this.
posted by kindall at 7:20 AM on August 8, 2005
An LLC can be taxed either as a corporation (like a C corp) and pay you a salary/dividends, or its revenues can simply flow through to your personal return (like an S corp). Your choice, and it looks like you already picked option 1, but the second option is usually better. The LLC's income appears on Form 1040 Schedule C and you pay both the employee's and the employer's portion of FICA on Schedule SE (you get to deduct the employer's portion, however, since it is a business expense).
The exception is if the LLC is not paying you a salary but giving you perks (say the company owns a jet and, as its CEO, it lets you fly anywhere you want for free, and that's all the compensation you want). Then it's better to have the LLC pay corporate taxes.
If you had been using flow-through all along, you could have written off the past years' losses against your personal return, which probably would have been more beneficial to you than reporting a corporate loss. It may be possible to amend your past filings and use your past losses to offset some of your income this year, but I wouldn't bet on it.
Again, you definitely need to ask an accountant about this.
posted by kindall at 7:20 AM on August 8, 2005
You can re-characterize as an S-Corp but IIRC it won't take effect till next calendar year.
posted by phearlez at 9:32 AM on August 8, 2005
posted by phearlez at 9:32 AM on August 8, 2005
Wages paid to employees are deductible from a corporation's income. So, if it would cost you less to set up the employee stuff, you can at least pay yourself some salary. As an owner, you can only take out a reasonable salary. I can't tell you offhand what is reasonable, or how to determine it, but this might mean that you can't just take everything out carte blanche.
If you have the corporation just pay you the money, the IRS would consider this a dividend. The company would have to pay tax on that income, and then you would have to pay tax on the income that you received as a dividend. This is the problem with having your entity recognized as a corporation by the IRS.
However, on the upside, you say the business has been running a loss of about $3,000. This loss can be carried forward to offset any gains the business now has.
Your best bet here is difficult to decide without knowing how much of a gain the LLC has this year. But the above should give you a good idea about the tax implications. Bear in mind, I'm not a lawyer, and you should seek the advice of a professional, either a lawyer or an accountant.
posted by MrZero at 3:34 PM on August 8, 2005
If you have the corporation just pay you the money, the IRS would consider this a dividend. The company would have to pay tax on that income, and then you would have to pay tax on the income that you received as a dividend. This is the problem with having your entity recognized as a corporation by the IRS.
However, on the upside, you say the business has been running a loss of about $3,000. This loss can be carried forward to offset any gains the business now has.
Your best bet here is difficult to decide without knowing how much of a gain the LLC has this year. But the above should give you a good idea about the tax implications. Bear in mind, I'm not a lawyer, and you should seek the advice of a professional, either a lawyer or an accountant.
posted by MrZero at 3:34 PM on August 8, 2005
I am an accountant, and most of the advice here has been correct. In general, the only reason to treat an LLC as a corporation is to enable the owner to get some benefits on a tax-advantaged basis. If you don't want to pay a tax at both the corporate and individual levels, you will have to pay the profits out to yourself as a bonus. Unfortunately, that means you will, at least, have to pay the employment taxes on that income twice.
You can elect S Corporation status, but as phearlez says, you must elect it by March 15 (assuming it's on a calendar year-end basis) or wait for the next year for the election to be effective. There are also some drawbacks associated with electing to be an S Corporation, but given the situation you've described, the built-in gains tax is not likely to be a serious issue, though the tax treatment of benefits may.
Honestly, and I don't mean to be harsh, if you don't know this already, you really need an accountant. Or do you already have one? It's unusual for someone to decide to elect to have his LLC treated as a corporation without an accountant being involved, and there may have been good reasons to make that choice initially. Situations change, though. Accountants are not really all that expensive, especially if you go to a small, local firm, where they should give you good service at a reasonable price. If you don't have that sort of advice, you run the risk of missing out on a lot of opportunities, and as your business grows, you run much more serious risks with things like payroll taxes where you can seriously screw yourself up by failing to comply with all the rules.
posted by anapestic at 3:59 PM on August 8, 2005
You can elect S Corporation status, but as phearlez says, you must elect it by March 15 (assuming it's on a calendar year-end basis) or wait for the next year for the election to be effective. There are also some drawbacks associated with electing to be an S Corporation, but given the situation you've described, the built-in gains tax is not likely to be a serious issue, though the tax treatment of benefits may.
Honestly, and I don't mean to be harsh, if you don't know this already, you really need an accountant. Or do you already have one? It's unusual for someone to decide to elect to have his LLC treated as a corporation without an accountant being involved, and there may have been good reasons to make that choice initially. Situations change, though. Accountants are not really all that expensive, especially if you go to a small, local firm, where they should give you good service at a reasonable price. If you don't have that sort of advice, you run the risk of missing out on a lot of opportunities, and as your business grows, you run much more serious risks with things like payroll taxes where you can seriously screw yourself up by failing to comply with all the rules.
posted by anapestic at 3:59 PM on August 8, 2005
Response by poster: Thanks everyone for your feedback! I do realize this is way over my head, and have begun the search for an affordable and reliable accountant. (Have any friends in Denver who do this?)
Anapestic, to answer your question, I had gotten some advice when we started it up and because it was never intended to really make $$ and the yearly forms would be easy to manage.
posted by dhammala at 8:21 PM on August 8, 2005
Anapestic, to answer your question, I had gotten some advice when we started it up and because it was never intended to really make $$ and the yearly forms would be easy to manage.
posted by dhammala at 8:21 PM on August 8, 2005
I had gotten some advice when we started it up and because it was never intended to really make $$ and the yearly forms would be easy to manage.
If that was the motivation, you got some bum advice. A single-member LLC (unless you elect to have it treated as a corporation) is a disregarded entity for income tax purposes. In other words, it requires no separate form: you would just file a Schedule C and include it on your regular 1040. On the other hand, if you were able to file the 1120 yourself, it probably didn't cost you much, except that you didn't get to take the losses on your 1040, and, technically, if you weren't intending to make a profit, you shouldn't have been taking them anyway, though a lot of people do.
posted by anapestic at 8:07 AM on August 9, 2005
If that was the motivation, you got some bum advice. A single-member LLC (unless you elect to have it treated as a corporation) is a disregarded entity for income tax purposes. In other words, it requires no separate form: you would just file a Schedule C and include it on your regular 1040. On the other hand, if you were able to file the 1120 yourself, it probably didn't cost you much, except that you didn't get to take the losses on your 1040, and, technically, if you weren't intending to make a profit, you shouldn't have been taking them anyway, though a lot of people do.
posted by anapestic at 8:07 AM on August 9, 2005
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You could also ask the Small Business Administration for advice, or even for the phone number of an accountant who could help.
posted by grouse at 3:56 AM on August 8, 2005