8

I am the sole member of an LLC. I am going to open up a bank account for it. I have $5,000 that I want to open it with.

If I understand correctly, I am allowed to pay myself from the profits at the end of the fiscal year. But what if I want money before the end of the fiscal year? How can I withdraw money early? It's tough for me to pay myself a salary, because I don't know how much, if any, money the business will make.

Let's say I want to buy a new laptop for personal use, but I have no money in my personal checking account. How can I get the money out of the LLC bank account for me to buy this laptop?

Should I only open the account with the bank minimum $50, and then add more as needed? Or what other approach should I take?

(I hope this question is not too broad...)

4

There are TWO parts to an LLC or any company structure.

Liability shield

This being the entire point of creating an LLC.

The context is that a lawyer is after your LLC, and he's arguing that the LLC is not genuine, so he can go after your personal assets - your house, car, IRAs, tap your wife's salary etc. This is called "piercing the corporate veil".

What would he use to claim the LLC is not genuine?

  • Commingling assets - mixing and confusing LLC and personal money in the same accounts, buying yourself a sofa with LLC assets, etc.
  • The LLC was never adequately funded to operate as a standalone business, i.e. didn't have enough cash on hand to pay insurance deductibles on a claim.
  • Doing something dirty, using the shield to evade consequences.
  • Ignoring the "corporate formalities" such as having meetings with minutes, having written bylaws and enforcing them.

The determination here is between you and the judge in a lawsuit.

Suffice it to say, the way you withdraw money must consider the above issues, or you risk breaking the liability shield and becoming personally liable, which means you've been wasting the $25 every year to keep it registered.

Taxation

The IRS has a word for single member LLCs: "Disregarded entity".

The IRS wants to know that the entity exists and it's connected to you. But for reporting tax numbers, they simply want the LLC's numbers folded into your personal numbers, because you are the same entity for tax purposes.

The determination here is made by you. *LLCs are incredible versatile structures, and you can actually choose to have it taxed like a corporation where it is a separate "person" which files its own tax return. *

The IRS doesn't care how you move money from the LLC to yourself, since it's all the same to them.


The upshot is that while your own lawyer prohibits you from thinking of the assets as "all one big pile", IRS requires you to. Yes, it's enough to give you whiplash.

  • 1
    Your last sentence is not really true. While the IRS requires you to put the bottom line in one place, it doesn't require to to commingle the actual assets. You're not required to have a single bank account, you can have multiple and separate. You don't have to register business assets in your name - you can register them in the business name. Tax wise, business income is your income, and business expenses are your expenses, but that on its own doesn't mean there's something commingled. – littleadv Aug 2 '16 at 4:33
  • @littleadv good point. – Harper - Reinstate Monica Aug 2 '16 at 14:32
3

Generally, unless you explicitly elect otherwise, LLCs are transparent when it comes to taxes. So the money in the LLC is your money for tax purposes, there's no need to pay yourself a salary. In fact, the concept of salary for LLC members doesn't exist at all. It is either distributions or guaranteed payments (and even that is mostly relevant to multi-member LLCs).

The only concern is the separation of personal and LLC finances - avoiding commingling. Mixing your personal and business expenses by using the same accounts/cards for both business and personal spending may cause troubles when it comes to the liability protection in case of a lawsuit. I'd suggest discussing this with a FL-licensed attorney.

Bottom line - technically the withdrawal is just writing yourself a check from the business account or moving money between your personal and business accounts. If you're a sole member - you need not more than that. Make sure the operating agreement explicitly empowers you to do that, of course. There are no tax consequences, but as I mentioned - there may be legal consequences.

  • Maybe I am misunderstanding your answer. Are you saying that a bank account for an LLC is effectively a personal checking account, but used to keep money separate? And I can deposit or withdraw money whenever I want for personal use? – Evorlor Aug 1 '16 at 21:46
  • @Evorlor no, that's exactly the opposite of what I'm saying. Legally they're separate. But there's no tax consequences of moving money between them. – littleadv Aug 1 '16 at 21:49
  • Thank you for your answer. But unfortunately, I do not understand it. Let's say I want to buy a new laptop for personal use, but I don't have the money. So I withdraw the money from my LLC account and buy myself the laptop. Is this allowed? – Evorlor Aug 1 '16 at 21:52
  • 1
    @Evorlor nothing is forbidden - you can do whatever you want. But if you want to avoid piercing your liability shield (which is something that happens in case of a lawsuit if the plaintiff can show that the LLC and your person are inseparable financially speaking), you need to clearly distinguish what's yours and what belongs to the company. If you want to buy a personal laptop - if you have enough money in the LLC, you make a distribution to yourself, and buy the laptop with your own money. If you want to buy a laptop for business - you buy it with the LLC money directly. – littleadv Aug 1 '16 at 22:02
3

What you're asking about is called a "distribution" when it comes to an LLC. It's basically you paying yourself some or all of the proceeds of the business, depending on how you're set up. You can pay yourself distributions on a regular schedule, say monthly, or you can do it at the end of the year.

Whatever you do in this regard, what you take out as distributions is reported on your personal income tax as taxable income. LLCs in the U.S. use pass-through taxation (unless you intentionally elect to have the LLC treated as a corporation for tax purposes, which some people do), so whatever the principals receive in distribution is personally taxable.

Keep in mind that you'll have to pay ALL of the taxes normally covered by an employer, such as self-employment tax (usually about 15%), social security tax, and so on. This is in addition to income tax, so remember that.

I hope this helps.

Good luck!

  • Thank you, that does help. I do have a couple of questions, though. Do distributions have to be on regular intervals, or can I pay myself whenever I want? And when I withdraw my initial investment, does that also get taxed as income? – Evorlor Aug 2 '16 at 2:17
  • -1 for "so whatever the principals receive in distribution is personally taxable." and "what you take out as distributions is reported on your personal income tax as taxable income.". Both statements are blatantly incorrect – littleadv Aug 2 '16 at 4:35

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.