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Let's say I own a business selling widgets on the web. I'm incorporated, most likely an LLC. The business is doing really well and there is a lot of cash flow. Since I'm separated from the business by the LLC, how do I as the business owner reap the benefits of my successful online business? How do I take some of the profits out of the business?

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There are two main ways an LLC owner can obtain money from the LLC:

  1. 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. How withdrawals are taxed depends on whether the LLC is taxed as a partnership or a corporation (see more on that below).
  2. 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.

These two methods have different tax implications, so speak to an attorney or accountant about these.

To make a point about Tim's comment, an LLC does not have to be a pass-through entity. An LLC can choose to be treated as a separate corporation for tax purposes. From the Nolo website:

If you will regularly need to keep a substantial amount of profits in your LLC (called "retained earnings"), you might benefit from electing corporate taxation. Any LLC can choose to be treated like a corporation for tax purposes by filing IRS Form 8832, Entity Classification Election, and checking the corporate tax treatment box on the form.

See Simple Overview of LLC Pass Through Taxation for more details on pass-through taxation.

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The IRS has information about procedures for compensating yourself for your efforts in carrying on a trade or business. Here are some of the procedures discussed there:

  • Wages or salary
  • Dividend distributions
  • Shareholder loan
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