Consultant’s Corner: Salaries for LLC Members

Consultant’s Corner: Salaries for LLC Members

Q. Can an LLC pay one of its members a salary? Is that what guaranteed payments are?

Single and multi-member or owner LLCs taxed as corporations (C or S types) are generally required to pay their members who hold executive officer positions and manage the day-to-day business of the LLC, or otherwise work in their businesses, a reasonable W-2 salary in order to comply with IRS rules.

A single member LLC taxed as a sole proprietorship (a disregarded entity) does not pay its member a W-2 salary. Nor does it pay its member guaranteed payments. Instead, its member takes periodic cash draws of the business profits which the LLC cannot deduct as a business expense.

A multi-member LLC taxed as a partnership does not pay its members a W-2 salary.  The members generally take periodic cash draws of their shares of the LLC’s profits which the LLC cannot deduct as a business expense.

However, multi-member LLCs taxed as partnerships can elect to pay their members guaranteed payments, which are akin to salaries and a tax deductible business expense for the LLC. Guaranteed payments can be a method for an LLC taxed as a partnership to compensate its members who work in the business and need to draw regular compensation. It is important to understand, however, that guaranteed payments cannot be based upon a member’s LLC profit sharing percentage.

To develop a better understanding of guaranteed payments, you can review IRS and related information on guaranteed payments at the following websites:

https://www.irs.gov/publications/p541/ar02.html#en_US_201601_publink1000104261

http://www.varnumlaw.com/blogs/varnum-etc/guaranteed-payments-the-equivalent-of-a-salary-for-llc-members-and-partners/

http://tax.cchgroup.com/downloads/files/contemporary-tax-practice/m1-partnership-taxation/t3-reporting-partnership-income-guaranteed-payments/d-determining-partnership-guaranteed-payment-deduction-allocation.asp

Got Business Questions?
Get unlimited online business consultation. Learn More

About the author

Bill Wortman

Bill Wortman is the Chief Business Consultant for GoSmallBiz.com, with over 40 years of business experience. In addition to 12 years consulting small business owners, Bill’s professional career includes a big-eight CPA accounting firm, national consumer finance, big-three automotive manufacturing, Arby’s fast food, marketing, and other industries. He’s held multiple executive-level positions and fulfilled the role of CFO at large, publicly held (NYSE, NASDAQ, and AMEX) corporations. In addition, he’s been an owner of private ventures involving residential real estate development and a General Motors new car dealership.

Leave a Comment

Comment (required)

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Name (required)
Email (required)