How Does a Restaurant Owner Pay Themselves Through an LLC

Are you a restaurant owner trying to figure out how to pay yourself? Search no further, this post covers all the different ways restaurant owners can pay themselves!

Setting up an LLC isn’t challenging to do at all. For many states, you can even do it yourself. For all states an attorney can assist you, similarly, there are many services that can help walk you through this process. The scope of options is too broad for today’s post, in the future we will walk you through the options.

As you dive into the process of setting up your entity (or entities), you will begin asking yourself a handful of questions:

• How will I get paid?
• Do I pay myself with a paycheck?
• What will change about my taxes?

Clearly this answer depends on the structure of your LLC (operating agreements/ membership agreements, etc.) and the overall asset protection strategy. Always consult your legal and tax professional before your set up an LLC or similar business structure.

How Does a Single-Member LLC Restaurant Owner Get Paid?

Assuming your single-member limited liability company (LLC) is not electing to be a corporation (S-Corp or C-Corp covered later in this post), a single-member LLC is considered a sole proprietorship in the view of the IRS. This is often referred to as a disregarded entity. It is still a living entity (limited liability company), but the nuisance is you file the business’s income and expenses directly on your personal tax return. No business return is required (yes sales tax is still required)

As a single-member LLC, you are not an employee or even allowed to be under the IRS’s definition. I always recommend filing to get an EIN so that your social is not floating around.

That being said, since you are not an employee, you do not pay yourself via a paycheck. Instead, you will need to take an ‘owners draw’ from the business.

How to Process a Single-Member LLC Owner’s Draw?

There are few ways to complete a ‘draw’ or ‘owners draw.’ Here are the options:

1. Write yourself a business check (with the payee as yourself)
2. Withdraw cash (even though I prefer 1 or 3 as the transaction trail is clearer)
3. Transfer funds directly to your bank account from your LLC’ account (wire or ACH are acceptable)

Not all the options above are available to everyone. Some banks have restrictions related to transferring from business accounts to personal accounts. So consult your business banking representative to ensure you are set up for success.

The key most small business owners miss on the onset is that they think the only taxable income is the amount of the ‘owners draw’ or ‘draws.’ This is incorrect, the amount of the net income for the single-member LLC is taxable income to the owner of the entity.

So even if you made $10,000 in net income last month, only taking an owners draw of $2,500, the entire $10,000 is taxable income to you.

How Does a Multi-Member LLC Owner Get Paid?

If you start a limited liability company (LLC) with any partner besides your spouse, the IRS requires you to follow the rules of the multi-member LLC. Not to worry, the rules do not stray too far from the rules of the single-member.

Assuming your multi-member limited liability company (LLC) is not electing to be a corporation (S-Corp or C-Corp covered later in this post), this section still applies to you. As a multi-member LLC, not electing a corporation status, you are still not an employee or even allowed to be under the IRS’s definition. Since you are not an employee, you do not pay yourself via a paycheck. Instead, you will need to take an ‘owners draw’ from the business.

The multi-member LLC nuance here is that the members will have to decide on each person’s share in the company. This decision is usually decided prior to starting the business and guided by what is called an operating agreement. This agreement, essentially the law of your business will decide which members own what percentage of the business.

The operating agreement will likely determine how much each member will get paid. It will certainly determine how much profit the member will have to report on their taxes.

How to process a Multi-Member LLC Owner’s Draw?

There are few ways to complete a ‘draw’ or ‘owners draw.’ Here are the options:

1. Write yourself a business check (with the payee as yourself)
2. Withdraw cash (even though I prefer 1 or 3 as the transaction trail is clearer)
3. Transfer funds directly to your bank account from your LLC’ account (wire or ACH are acceptable)

Not all the options above are available to everyone. Some banks have restrictions related to transferring from business accounts to personal accounts. So consult your business banking representative to ensure you are set up for success.

The key most multi-member LLC small business owners miss is that they think the only taxable income is the amount of the ‘owners draw’ or ‘draws.’ This is incorrect, the amount of the net income attributable to each member of the multi-member LLC is taxable income to the owners of the entity (again defined by the operating agreement).

So even if you made $20,000 in net income last month, only taking an owners draw of $1,500, the entire $2,000 is taxable income to the owners of the multi-member LLC.

Agree to Agree

Do not start paying yourself without discussing these matters with your business partners.

Everyone needs to be in agreeance with the percentage of ownership and the related owners draws. Ideally, before you start the business (form the entity), sit down and discuss compensation and ownership. Discuss when each member will get paid, how much they will get paid, and other matters regarding compensation like each member’s taxable income.

Then put these agreements, rules, and policies into your operating agreement to hold everyone accountable and have things in writing if confrontations arise.

Plan for Tax Season

Remember that draws are not paychecks.

In layman’s terms that means you have not paid your taxes on the money you receive. You are not making any contribution to Social Security or Medicare when you take the money out of your profits. When you report your earnings on your taxes, you must report both the LLC’s profits and your draws.

Your portion of the LLC’s profits will be taxable to you. If you want to stay on top of your taxes and prevent paying a lot in April, consider paying taxes quarterly. Also, read my post on ‘a simple trick to prepare your restaurant for tax time (coming soon!).

Treating Your LLC Like a Corporation and Paying Yourself a Paycheck

We all desire to play by different rules. Well lucky for you, by electing to be an S-Corporation (aka S-Corp) or a C-Corporation (aka C-Corp), you can. This allows you to pay yourself via payroll and receive a W-2. Be wary, filing as a C-Corporation results in double taxation, owners draws become dividends, meaning they are again taxable.

Most small to medium-sized businesses elect to be an S-Corporation if they want to be a corporation at all. This allows you to be included on the regular payroll, receive a paycheck and be treated as a W-2 employee. As the owner, you will have to fill out the right forms to ensure that taxes are taken out of your paycheck. Both single-member LLC and multi-member LLCs can elect to be an S-Corporation.

The net income or business profits are still reported on your personal tax return like any other LLC. There are optimum salary and net income configurations that allow for the minimum tax payment, Speak with your qualified CPA for specific structuring. S-Corporations also carry additional requirements related to salary, you can only pay yourself market rate for your services.

For many potential LLC owners who plan on a decent business income, this structure sounds like the best option. Be careful with this structure, the IRS take note of how much you pay yourself, and it should be a market amount.

Laws May Vary From State to State

Not all states treat LLCs the same. Florida, for example, doesn’t allow single people (or married couples) to go into an LLC alone. If you want to set up an LLC in one state, however, you may be able to operate in a different state and operate under the rules of the origin state.

Talk to a CPA or legal services provider for more information on properly setting up an LLC and what you need to report on personal (or business) taxes.

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.