Jack DonaldIf you want to team up with someone to do business and form a company together, you will have to decide on its structure. Depending on the field of activity and your preferences, there may be several options, but the main ones are: corporation, LLC and partnership.
Corporations tend to be the more complex type of enterprise, so aspiring entrepreneurs usually choose between multi-member LLC and general partnership.
An LLC is the most common. This formal business structure combines the best features of other business types and gives co-owners such advantages as:
- Limited liability: an LLC is a separate legal entity, thus multi-member LLC owners are not liable for its obligations. In terms of practice, this means that the claims of creditors are subject to satisfaction only at the expense of the assets of the company and, regardless of the situation, will not affect the personal property of its owners;
- Tax benefits: the LLCs are exempt from filing mandatory tax returns at the federal level. Business income and losses are reported only on LLC owners personal returns, which allows them to avoid double taxation.
However, all these advantages apply only if business and personal finances strictly separate, otherwise the company may lose its special status. Maintaining the corporate veil is essential for doing business as an LLC, and sometimes it causes its owners difficulties related to the process of paying for their own labor.
Let’s take a look at the basic payment options that will allow you to maintain the LLC’s personal asset protection and, at the same time, take into account the interests of its owners.
What Is a Multi-Member LLC?
When it comes to simplicity, it is almost impossible to compete with a general partnership. There are no formal requirements for this business structure, such as filing Articles of Organization or registration fees, with the exception of obtaining permits related to a particular activity. You can simply get down to work and enjoy the benefits of partnership status. It is pretty convenient. However, despite this advantage, the most popular structure is still the LLC. Why? Because of limited liability protection, which guarantees the owners the safety of their personal assets.
If you want to answer the question “What is the multi-member LLC?”, you must first pay attention to the principles underlying it.
As a result of the process of forming a multi-member LLC, there is a separate legal entity, which is different from its participants. When they start a business, they only risk the funds that have been contributed to the company’s share capital, while their personal property, such as money, real estate, cars, etc., remains intact. This is multi-member LLC’s most important function, which makes it so popular.
You can create a multi-member LLC either through a cheap LLC service or form it yourself, using the guidelines that are available on the Internet.
How Do I Pay Myself From a Multi-Member LLC?
The owners put a lot of effort into the creation and development of the company and, of course, are entitled to fair payment. After all, business must bring money.
However, when owners are faced with the question of how and in what amount to accrue their salaries, some of them find themselves in difficulty.
The process of forming a multi-member LLC requires a lot of time and money. Therefore, when organizing its work, it is very important to maintain personal liability protection, so that the efforts will not be in vain. Proper allocation of finances is the key to this.
It is always hard to get started.
At the initial stage, expenses are higher than income. And only after some time the income of the growing LLC gradually begins to exceed the amount of expenses. The owners must not only pay yourselves a regular salary, but also invest part of their income in the development of the business. So that the company starts to grow and constantly bring profit, it requires regular investments. That is why you should carefully choose how you want to pay salaries.
There are two main ways of forming a salary:
- Get percentage of your LLC’s income;
- Set a flat fee.
The first way is great for growing LLC whose income is still unstable but needs are great. The funds left on the balance sheet after paying the owners, in this case, would be reasonable to reinvest in order to increase possible future profits. This method is good, but it does not provide a stable financial flow, thus some business owners prefer to use the alternative option.
When the company asserts its position and begins to generate a serious income that covers all of its expenses, participants can switch to the payment of a fixed fee without any losses. However, you should follow the golden mean rule when determining its size. Otherwise, there is a risk of losing multi-member LLC’s compliant status if the IRS finds your actions illegal.
Fortunately, to avoid the situation where your personal asset protection revoked, all you have to do is not to draw the attention of the IRS to excessive payments.
A reasonable approach to determining the owners’ salary does not mean that their interests are infringed. You can have a decent income and be free to pay yourself various bonuses. However, if a lawsuit is ever filed against your company, the court should have no doubt that the income of the LLC and your personal funds are not the same.
To make sure you are not overpaying yourself, it will be enough to do a little research. Knowing the lower and upper earnings limits in your chosen field, you can easily navigate and set a fair wage for yourself.
In Conclusion
In this way, the process of paying yourself from a multi-member LLC does not seem complicated in reality. The secret of successful solution of this problem is to set a wage that, on the one hand, will allow you to feel financially secure, and on the other hand, will not attract unnecessary attention from IRS specialists.
The information on average wages can help you avoid mistakes and determine how to pay yourself from a multi-member LLC. This information is publicly available, and you can easily find it online. Use this information to strike a balance.
