Stephen L. Nelson, CPA, MBA, MS(tax)




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How does the owner of the limited liability company report amounts he or she pays to himself or herself?

How an LLC categorizes payments to LLC owners depends on the tax classification of the limited liability company:

  • Single-member limited liability companies treated as sole proprietorships

    If a limited liability company has a single owner, the limited liability company is disregarded.

    In terms of the bookkeeping, this "dis-regardization" means that the payments to the limited liability company owner are treated as a proprietor draws.

    Note that the draws are not wages. The draws represent distributions of the business profit.

  • Multiple-member limited liability companies treated as partnerships

    If two or more members own a limited liability company, tax law treats the limited liability company as a partnership. In this case, payments to members/partners get treated as partner draws.

    As is the case with the proprietor draws, partner draws are not wages. The draws represent distributions of business profit.

    Unfortunately, here I need to muddy the water a bit: In some partnerships, partners are paid wage-like amounts called guaranteed payments. A guaranteed payment made to a partner is a business deduction, though the guaranteed payment is not treated as wages. The partnership doesn't have to withhold payroll taxes on the guaranteed payment. The partnership should, however, use a special guaranteed payments expense category to track these disbursements.

    Note: A partnership may also make guaranteed payments that amount to the interest paid on the money that a partner has invested into partnership. Again in this case, a guaranteed payment is a business deduction. And the partnership accounting records should use a separate expense category to track these "interest-like" guaranteed payments.

    Note: Distributions as well as guaranteed payments get reported on the K-1 the "LLC" partnership annually prepares and then provides to LLC members.

  • Limited liability company treated as an S corporation

    If a limited liability company elects to be treated as a subchapter S corporation, the amounts the LLC pays to LLC members fall into one of two categories: wages or distributions.

    Amounts that the "LLC" S corporation pays to shareholders for their services gets treated as wages. In other words, any amounts paid to an LLC member working as a shareholder-employee in an S corporation gets treated like the wages paid to any other employee. Amounts paid to an LLC member merely because of his or her ownership gets treated as an S corporation distribution. An S corporation distribution is not a business deduction. An S corporation distribution closely resembles a proprietor or partner draw.

    Note: The wages that an "LLC" S corporation pays to an LLC member get reported on a W-2. The distributions that an "LLC" S corporation pays to an LLC member get reported on the K-1 the S corporation annually prepares and provides to LLC members.

  • Limited liability company treated as a C corporation

    If a limited liability company elects to be treated as a C corporation, the amounts paid to LLC members fall into one of two categories: wages or dividends.

  • Wages paid to LLC members working in the business get treated as regular employee wages.

    Amounts paid to an LLC member by virtue of his or her ownership get treated as dividends. Superficially, dividends resemble an S corporation distribution. You can, for example, simply write a check to the shareholder. Note, however, that dividends are taxable to the recipient. (In comparison, S corporation distributions and proprietor and partner draws are typically not taxable.)

    Note: The wages that an "LLC" C corporation pays to an LLC member get reported on a regular W-2. The dividends that an "LLC" C corporation pays to an LLC member get reported on a 1099-DIV which the C corporation annually prepares and provides to LLC members.

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