Introduction - Profiting From Your Passion: The Entrepreneur's Guide
Finally, your passion project turned business is not just surviving, but thriving. As the dollars flow in, you might be wondering, "How do I pay myself?" After all, understanding your compensation as a business owner is not as straightforward as receiving a paycheck. In this blog, we demystify the process of paying yourself based on different business entity types.
Section 1 - The Different Business Entity Types
Different business structures dictate how owners can draw income. Here are the primary types:
- Sole Proprietorship: A business owned and run by one individual.
- Partnerships: This involves two or more people who agree to share in the profits and losses of a business.
- Limited Liability Company (LLC): A hybrid structure that combines the simplicity of a sole proprietorship or partnership with the liability protection of a corporation.
- Corporations (S Corporation and C Corporation): A legal entity that separates the owners' personal assets from the business.
Section 2 - Show Me the Money: Paying Yourself as a Business Owner
1. Sole Proprietorship & Partnerships
For these structures, you don’t receive a paycheck in the traditional sense. Instead, you take "draws" from the business profits. However, remember that these draws are taxable, and you need to set aside money for self-employment taxes.
2. LLC
LLC owners can opt to pay themselves through owner draws, similar to a sole proprietorship or partnership, or by salary and dividends, more akin to a corporation. This decision depends on the specific tax benefits of each option.
3. S Corporation
Owners receive a "reasonable" salary, which is subject to payroll taxes. Additionally, they can take non-salary distributions, taxed at the owner's income tax rate, but not subject to payroll taxes.
4. C Corporation
Owners who work in the corporation receive a regular salary, which is deductible from the corporate income. Any additional profits can be distributed as dividends, but these are taxed twice: first at the corporate level, and then on the owner's personal tax return.
Section 3 - Money Matters: Frequently Asked Questions (FAQ)
Q: Should I pay myself a salary or dividends from my corporation?
A: The answer depends on various factors, including your personal income level, corporate income, and the current tax laws. Consulting with a tax professional or accountant is the best way to determine the optimal mix of salary and dividends.
Conclusion - Invest in Insight: Your Business is Worth It
Deciphering the best way to pay yourself as a business owner can be daunting. But with a clear understanding of your business structure and some expert advice, you can navigate these waters smoothly. Remember, investing in a comprehensive understanding of your finances today lays the foundation for a thriving business tomorrow.