Paying Yourself as a Single Member LLC or Sole Proprietor
Nov 16, 2020
Most of us start businesses so we can earn a living. Unfortunately, most small business owners are not paying themselves regularly, consistently, or even know the proper way to pay themselves from their LLC or as a sole proprietor.
So how do you pay yourself if you’re the proud owner of a sole proprietorship or single-member LLC? How can you make money from the business you’ve started? Here’s a quick roadmap.
First – Let’s Define Sole Proprietor
When it comes to your taxes, there is no difference between a sole proprietor and a single member LLC (SMLLC) unless you’ve elected to have your LLC taxed as an S-Corporation. In this post, we will use these terms interchangeably. The information contained in this post apply to both sole proprietors and single member LLCs that have not elected S-Corporation status. If you do have an S-Corporation, you can find information on how to pay yourself properly here.
Second – Keep Your Business Money and Personal Money Separate
Can you do business and personal banking out of a single account? Technically speaking, yes. Should you, though? Uhhh absolutely not. You’ve got to keep them separated (our apologies to Dexter Holland).
The easiest way to do this is to set up a bank account specifically for your business. As a reminder – you do not need an LLC to have a business bank account. Do not let this be a barrier to conducting business properly.
Every penny that you make from doing business will get deposited into that account. Every penny you pay for your business expenses comes from that account. The pizza you ordered for dinner last night, after you had stopped working for the day? The money for that comes from your personal account.
Third – Pay Yourself
When you need money for personal stuff, transfer money from your business account into your personal account. This is usually called a “draw”.
Okay, not really. While the action of paying yourself as a small business owner with an LLC really boils down to that second simple step, that action can only happen after planning and with meticulous tracking. Here’s how that works.
Do Some Math
Hopefully by now you’ve done the math to figure out how much money you need to make each year in order to survive (and order pizza).
You have likely also already figured out how much money your business needs to make to keep the proverbial lights on and the taxes paid.
Add those two numbers together. That is the absolute minimum your business needs to bring in each year.
Create a Schedule
Yes, technically speaking, you can take a draw whenever you want. It will feel better though, if you set up a payment schedule – kind of like you used to have when you were someone else’s employee. That schedule can be weekly, monthly, heck—even quarterly if you want. Whatever you choose, set those dates in stone and abide by them. Consistency is key!
Don’t treat yourself worse than Corporate America treated you – pay yourself regularly and consistently.
Seriously. Track everything. A lot of sole proprietors get overwhelmed by how much financial tracking they have to do and outsource that work to a small business accountant. There is no shame in doing this, particularly if you haven’t ever done business accounting and taxes before. A small business CPA can literally save your financial life (and thousands of dollars) when tax time rolls around (and it does every few months when you’re a sole proprietor)!
If you want to attempt to do your bookkeeping yourself, that’s cool too. Just make sure you set up a system that you know you will stick to and that you understand. There are a bunch of small business accounting apps out there that can help make this easier for you. Or, if you want to really do everything yourself, you can track everything in Excel. Just make sure that you write down every penny that comes in and goes out of your business (and that you keep your receipts) in a way that will make sense to you (and possibly the IRS) later.
Obviously, this is just a brief overview of the “getting paid” process. There are a lot of other details to understand about your business’s finances. But for now, hopefully this will help you get started!
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.