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4 Replies Last post: Aug 4, 2009 10:43 PM by quickbooksgal

LLC Members: Salary or Draws?

Aug 4, 2009 1:54 AM

Click to view goinguild's profile Start-up goinguild 2 posts since
Jul 4, 2009
We just formed an LLC in Delaware. I'ved set up QuickBooks and we seem to be doing most of our accounting activities properly. We plan to plow most of our profiut back into the business, but do need to take some amount of "salary". However, I just happened upon a forum thread where one of the individuals mentioned that the members (aka owners) of a LLC cannot be paid salaries, but must instead only take "draws" against retained earnings/equity. If true, I'm disappointed since we were planning to have our payroll service take care of all the tax calculations and payments for everyone.

Question 1: Can someone verify if LLC members can or cannot be salaried?

Question 2: If not, how are W-4, W-2, withholding, Social Security, etc. taken care of? Do we just act as sole proprietors in some way?

Thanks!

Trying to do it right.

GoinGuild
Tags: accounting, llc, llc_taxes Report as inappropriate
Click to view LUCKIEST's profile SCORE LUCKIEST 7,926 posts since
Aug 6, 2007
1. Re: LLC Members: Salary or Draws? Aug 4, 2009 6:46 AM
LLC Members, Welcome

Everybody in business should have an accountant, a lawyer and an insurance broker.

Talk to the professional. Good luck, LUCKIEST
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Click to view ArcSine's profile Professional ArcSine 6 posts since
Jun 3, 2009
2. Re: LLC Members: Salary or Draws? Aug 4, 2009 11:52 AM
Unfortunately, what you heard is correct...LLC members are not 'employees' for payroll and payroll tax purposes. And I know right where you're coming from--it'd be much easier if your 'salaries' could be run through the payroll service.

Instead, the members will take draws from the LLC, and will make personal quarterly tax estimate payments. Remember that a member's taxable income (and hence the amount of tax estimate payments the member must make) will be based on the member's share of the LLC's net profits, and NOT based on the amount of draws the member takes out. If you and I are 50 / 50 partners in an LLC, and that LLC had $300 in net taxable profit, then you and I each pay tax on $150, whether we took draws, didn't take draws, or took out unequal amounts.

(That's why, if you're planning on reinvesting a significant portion of your profits back into the biz, you'll want to consider having the LLC make distributions to the members at least sufficient to cover their tax obligations.)

Best of luck on your new venture!
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Click to view goinguild's profile Start-up goinguild 2 posts since
Jul 4, 2009
3. Re: LLC Members: Salary or Draws? Aug 4, 2009 10:19 PM
in response to: ArcSine
Thank you. That was very helpful and synchs up with what I've seen in my QuickBooks installation in terms of the Chart of accounts.
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Click to view quickbooksgal's profile Authority quickbooksgal 11 posts since
Aug 4, 2009
4. Re: LLC Members: Salary or Draws? Aug 5, 2009 12:35 AM
I want to add some light. There are several ways an LLC is formed so the advice in this thread may not be entirely correct. There are many very large corporations that have shareholders and they are paid staff. I don't see where you indicated what type of LLC you have formed, whether it is a General Partnership or an S-Sorp. On top of that, you may also have on your Balance Sheet Notes Payable from you and your partner into the company that you will need to pay back prior to either payroll or distribution. There is a line right from Intiut's Corporation page under the LLC column, "IRS rules now allow LLCs to choose between being taxed as partnership or corporation". Here is the link to their site http://mycorporation.intuit.com/business-formations/incorporate.jsp?view=compare If you need further assistance, let us know http://www.qualityconsultingandbilling.com/index.htm.

Good Luck!
Denise
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