Can a Partner in an LLC Receive a Salary?

By Jennifer Kiesewetter, J.D.

Can a Partner in an LLC Receive a Salary?

By Jennifer Kiesewetter, J.D.

Partners in a limited liability company (LLC), also known as members, aren't considered employees. Given this, a partner generally cannot receive a salary.

Two businessmen looking at paperwork

LLCs Taxed as Partnerships

If an LLC has more than one member, the Internal Revenue Service (IRS) taxes the company as a partnership. The partners receive their shares of the company's annual income or profits throughout the year, often called distributions. Additionally, the partners can deduct their shares of expenses and losses on their personal tax returns.

Members of the taxed as partnerships report their distributions on Partner's Share of Income, Deductions, Credits, etc. (Form 1065, Schedule K-1) at tax time. Members also report their shares of the expenses and losses on this schedule. A member's percentage of distributions, expenses, and losses depends on that member's ownership interest. Additionally, members must pay self-employment tax on any amount of income derived from the company.

Guaranteed Payments

Guaranteed payments differ from the pass-through distributions described above. For example, for pass-through distributions, if it doesn't make a profit one year, members may not receive income. This could be a problem for certain members if they need money to pay day-to-day bills.

In some cases, members receive guaranteed payments even if the company doesn't make a profit. Essentially, a guaranteed payment is the functional equivalent to a salary.

LLCs treat guaranteed payments as an expense, just like salary payments. These expense deductions can pass through to the company's members, who are still subject to self-employment tax on guaranteed payments, just like they are on distributions.

Guaranteed payments should appear on a member's Schedule K-1. The members then report guaranteed payments as ordinary income on Supplemental Income and Loss ( Form 1040, Schedule E).

LLCs Taxed as Corporations

LLC members can opt for their company to be taxed as a corporation, rather than a partnership. The company has a choice of electing to be taxed as either an S corporation or a C corporation. Because corporations are legal entities that are separate from their owners, members who choose corporate taxation can receive W-2 compensation, just like other employees.

Members must pay themselves a salary that's reasonable. As members can also take distributions separate from their salaries, some of which are tax favorable, the Internal Revenue Service doesn't want members taking small wages and large distributions.

Subtle differences in the laws that govern S corporation taxation and C corporation taxation can make choosing one difficult. Consider consulting an experienced attorney who can assist you in understanding the law and your options.

Understanding your options as a member in an LLC not only clarifies how you receive compensation, but it helps you know how your distributions or salary impact your taxes, the company's taxes as well as the company's cash flow. Develop a business plan for your LLC with your distributions as a component.

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