How to "pay" one self in a single member LLC w/ separate checking account?
I own a side company creating web apps. I formed an LLC, registered an EIN and opened a business checking account. Recently, I sold a copy of my software for let's say $10,000. Now, since everything gets passed through to me personally, how do I go about "using" these funds for personal things like buying a home or buying a new TV?
I figure, from the IRS standpoint, they just want me to show profit/loss. As long as I keep track of this, they don't care what i do with my revenue, correct? I guess the question is, how do I show (do i?) that my business account has $10,000 but I transferred over $3,000 into my personal account in order to spend it?
1 Answer
I figure, from the IRS standpoint, they just want me to show profit/loss. As long as I keep track of this, they don't care what i do with my revenue, correct?That is a very dangerous statement. The IRS most definitely cares what you do with your business revenue.
You cannot use your business income to directly pay for your personal living expenses. The IRS has rules on what you can and cannot spend your business revenue on. There are also differences in how money is taxed.
You have an LLC, and although you are the sole member, you must treat the LLC as a separate entity from yourself. If you treat your business bank account like your personal piggy bank you could "pierce your corporate veil " and lose your liability protection.
how do I go about "using" these funds for personal things like buying a home or buying a new TV?You need to pay yourself. There are two main ways an LLC owner can obtain money from the LLC:
- Withdrawals: This is money distributed to the LLC owners after net profits have been calculated. You need to show a profit to take a withdrawal from the LLC.
- Guaranteed Payments: In essence this is a form of salary. Owners receive guaranteed payments in exchange for work performed, and it is done so before profits. Because guaranteed payments are distributed pre-profit they are treated as a business expense and can be deducted as such. Also, guaranteed payments are received by the owner regardless of whether the LLC turned a profit or not.
You may also find these other related threads helpful:
How to handle the money with a new start up How To Transfer Money Between Personal & LLC Bank Accounts
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With regard to Veil-Piercing and LLCs, John Cunningham has an excellent document about this on his blog: http://www.cunninghamonoperatingagreements.com/wp-content/uploads/ANTI-VEIL-PIERCING-GUIDELINES-8-12-04.doc That's targeted for New Hamphshire people, but the principles are similar to most other states. – Chris Fulmer 12 years ago
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@ChrisFulmer Thanks for the resource. – Zuly Gonzalez 12 years ago
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Sorry, let me reword, I wouldn't be paying personal expenses using my business account. So let's take my example. I sold for $10k. If I think about it, there are no writeoffs for the $10k. So if I wanted to transfer $5,000 into my personal funds so I can go buy a car, how do I show it? – Luckytaxi 12 years ago
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@luckytaxi You would just write yourself a check. Then account for it in your accounting software as either a distribution or a guaranteed payment (you need to decide which of the two works better for your situation). But, again, you have to be deliberate about this. You can't just move money between the two accounts willy nilly. – Zuly Gonzalez 12 years ago
