How to Pay Partners in an LLC

by Joseph Nicholson
    A member of a multiple-member LLC is paid like a limited partner.

    A member of a multiple-member LLC is paid like a limited partner.

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    How a member of an LLC is paid depends in part on how the company is taxed. A multiple-member LLC is taxed as a partnership by default, and by law a member cannot be paid a salary or wage for services provided as a partner. The LLC's Operating Agreement usually states the percentage of the company's profit each member is entitled to receive.

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    Step 1

    Make guaranteed payments as necessary. A member of an LLC can be paid wages or compensation for one-time services provided to the company. Lending the company capital qualifies as such a service. Guaranteed payments are deducted from the company's profit as a cost of business, and reported by the member as taxable income from self-employment.

    Step 2

    Pay salary against expected profits. In the early years of the business, members may elect not to receive any distribution of profits so the money can be reinvested in the company. Alternatively, a member can be paid a regular salary based on her share of the estimated profits. A member's salary, however, cannot be deducted from the company's income as a cost of doing business.

    Step 3

    Issue Schedule K-1. At the end of the year, each member of a multiple-member LLC should receive a Schedule K-1 from the company outlining the total profits earned and their share. If their share is less than what they've already received, they can receive a final check for the difference.

    Tips & Warnings

    • Except for guaranteed payments, members of an LLC report their distributions from the company on Schedule E, Form 1040, as supplemental income. Such income may be subject to self-employment tax unless the company elects to be taxed as an S-corp.

    About the Author

    Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.

    Photo Credits

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