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Phillips Esq.
Phillips Esq., Attorney-at-Law
Category: Business Law
Satisfied Customers: 17526
Experience:  B.A.; M.B.A.; J.D.
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I just formed a LLC with a business partner. How can we pay

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I just formed a LLC with a business partner. How can we pay ourselves if we do not have any other employees? Can we just split the money in our account without doing a payroll? How do we claim that on our taxes?
Submitted: 7 years ago.
Category: Business Law
Expert:  Phillips Esq. replied 7 years ago.

I just formed a LLC with a business partner. How can we pay ourselves if we do not have any other employees? Can we just split the money in our account without doing a payroll? How do we claim that on our taxes?

Response: For record purposes, you need a paper trail/electronic trail to avoid any misunderstandings. You would need to write a check to yourself and your partner. Then you would report the earnings on either the LLC tax returns or your individual tax returns depending on whether you have elected to be taxed either as a corporation or as a partnership.

You may want to open a payroll account where you would deposit the money to be used for paying you and your partner for that particular month. Let's say that at the end of the month, after expenses, you have income of $10,000.00 and let's say, you would keep $2,000.00 of this for operating expenses. Then, the $8,000.00 should be deposited in your payroll account and then you and your partner can be paid from that account. Again depending on whether you have chosen to be taxed at the LLC level (as a corporation) or the individual level (as a partnership), you can report this income on either your LLC tax return or individual tax return.

You can each open an individual account where a transfer from the payroll account would be made directly to each individual account, if you do not want to write checks.

Customer: replied 7 years ago.

This really didn't answer my question because I am trying to figure out how to pay ourselves without doing the payroll option. We did not file the additional paperwork to be taxed as a corporation. We are just registered as a partnership LLC with the IRS. I thought that the benefit of a partnership w/ a LLC is that we can pay ourselves from the account without having to do a payroll. For example, if we have $10K in our account to pay ourselves, can we just simply cut a $5K check for each of us, then we pay our taxes on our own? (I pay my taxes, and my partner pays hers)?

 

I'm wondering if we do this, how do we note that on the company taxes? Do we just say the business made $10K but paid it all out so then the business shows no profit and therefore, the company doesn't pay any taxes, but then my partner and I will each have paid our own taxes on the $5K each.

 

I know that there is a particular way this is done w/ LLCs (different than corps) but I am just trying to get clear what that is. I do know that with a corp it is better to do payroll taxes, but I thought that wasn't the case with a LLC.

Expert:  Phillips Esq. replied 7 years ago.

I did not mean payroll in a formal sense. I meant payroll as a way to designate your earnings to avoid misunderstandings with your partner. You do not have to create another account if you do not want to.

For example, if we have $10K in our account to pay ourselves, can we just simply cut a $5K check for each of us, then we pay our taxes on our own? (I pay my taxes, and my partner pays hers)?

Response 1: Yes.

I'm wondering if we do this, how do we note that on the company taxes? Do we just say the business made $10K but paid it all out so then the business shows no profit and therefore, the company doesn't pay any taxes, but then my partner and I will each have paid our own taxes on the $5K each.

Response 2: This will be noted in the proper Tax Schedules for reporting income, profits and losses. You need to consult with your tax accountant for the proper forms.

I know that there is a particular way this is done w/ LLCs (different than corps) but I am just trying to get clear what that is. I do know that with a corp it is better to do payroll taxes, but I thought that wasn't the case with a LLC.

Response 3: The difference between the tax treatment for LLC and Corporation is that with an LLC you will either choose to be taxed on corporate level or individual level whereas the corporation does not have that. With corporation there is the dreaded double taxation: taxation at corporate level and then at individual level.

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