Chaunie Brusie started freelance writing to have greater flexibility in her work while raising her kids. When writing about motherhood, marriage, and health, Brusie’s writing career started taking off. She knew writing was no longer just a side gig—it was a business, and she needed to structure it like one.
“The first year that my income as a freelance writer surpassed my husband’s teacher salary, I knew that it was time to talk to a tax professional about the best option for turning myself into a business,” Brusie said. “An LLC lays the foundation for your business to grow, establishes good financial habits, and offers some limited protection for your assets.”
Like many new business owners, when Brusie was first beginning her entrepreneurial career, she wasn’t aware of the best way to pay herself.
Restructuring her business and paying herself as an LLC was the answer. This allowed her to take home the most money possible while minimizing tax obligations and limiting tax liability.
If you’re considering setting up an LLC, you likely have a few questions about this business structure, how it works, what you should know, and how to begin operating.
Here’s what we’ll cover to help you get started:
Table of Contents
- What Is an LLC?
- What Type of LLC Should I Create?
- Single-member LLC
- Multi-member LLC
- How to Set Up an LLC
- How Do I Pay Myself From My LLC?
- Set Up Your Business Bank Account
- How Does Employment Tax Work For LLC Owners?
- Other Business Structure Options
What Is an LLC?
LLC stands for limited liability company. Limited liability means that owners of an LLC can’t be personally sued for debts or liabilities of the company. This type of business structure is designed to protect business owners if the company is sued or forced to repay a large outstanding debt.
An LLC ensures that your personal assets are protected. Even if your business loses its assets in a lawsuit or financial struggle, assets like your home, retirement funds, or savings are safe. Without the protection of an LLC, starting a small business can be risky.
Some entrepreneurs begin early operations as a sole proprietorship, but a sole proprietorship provides no legal distinction between the owner and the business. If legal or financial issues arise, the owner could be personally responsible.
While some people feel comfortable taking the risks associated with a sole proprietorship, many others don’t want to put personal finances at risk while waiting for their entrepreneurial pursuits to take off. LLCs give business owners the confidence and security needed to start a new venture.
What Type of LLC Should I Create?
Your needs as a business owner will determine the best type of LLC for you. The most significant factor affecting the type of LLC you need is whether you’re creating this LLC on your own or with business partners.
If you’re the sole owner of your business, you’ll set up a single-member LLC. This is the simplest type of LLC to create. It has low setup costs and an easy-to-navigate tax structure. Single-member LLCs can include many employees or just you. But as long as you’re the sole owner of the business, a single-member LLC is the best structure for you.
If you have business partners, a multi-member LLC is the structure you’ll want. Whether you have one partner or twenty, a multi-member LLC provides all owners personal asset protection. Each business owner is referred to as an LLC member, and each member must agree upon and sign an operating agreement.
Unlike the single-member LLC, the multi-member LLC has multiple options for management structure.
- A member-managed structure gives all owners of the LLC collective control. This is the most common type of multi-member LLC, especially for companies with only a few owners. In this structure, each owner has an equal say in each decision about the company.
- A manager-managed structure gives control of the LLC to one appointed manager. This is an excellent option for any business with one or more owners who can’t be involved in day-to-day operations. The manager runs the business, allowing owners to be more distantly involved. This structure also works well for LLCs when there are too many business partners for collective decision-making to be practical.
How to Set Up an LLC
Starting an LLC is an easy process that can take as little as ten minutes of your time. While it’s possible to set up your LLC on your own, allowing a professional incorporation business to help is the quickest and easiest option. However, if you want to move forward and do it yourself, follow the steps listed below.
- Gather information for your articles of organization.
Professional incorporation businesses like Better Legal, Zen Business, and Northwest will help you get all the information you need to file your articles of organization. You’ll need to provide them with your contact information, address, and LLC type, as well as the purpose of your business.
- Decide on a name.
Once you’ve chosen a company to help you set up your LLC, they’ll ask for the name of your LLC. You’ll need to choose a name for the business. You’ll have to check beforehand that another company hasn’t already taken your name. To do this, search your proposed business’s name in the United States Patent and Trademark database.
- Pay your filing fee and submit.
The final step before submitting your application is paying your state’s filing fee. Once submitted, you’ll wait for approval and your certificate indicating your business is registered.
- Keep track of your EIN.
It’s important to keep your certificate when you receive it because it should include an EIN. Your EIN is a number that acts as a social security number for your business. You’ll need this number when setting up your business bank account.
How Do I Pay Myself From My LLC?
The best way to pay yourself as an LLC is through an owner’s draw, sometimes called an owner’s distribution. The owner’s draw is the amount of money you take from the business and give to yourself. In a multi-member LLC, all LLC members can be paid with an owner’s draw.
Unlike a salary, an owner’s draw can vary in amount and timing. You can choose to pay yourself and your business partners however often and whatever amount you want. This flexibility is useful for new LLC owners because it can take time before new businesses begin generating predictable amounts of revenue. The owner’s draw allows you to balance your budget more easily by paying yourself on your own terms.
Set Up Your Business Bank Account
You’ll need a business bank account to pay yourself and your partners through an owner’s draw. Your personal bank account cannot be used to manage the LLC’s finances. Choose your preferred bank and visit the local branch, where an employee can walk you through each step of setting up your account.
If you’re setting up an account for a single-member LLC, you are the only one who needs to be present to open the account. All LLC members must be present when setting up an account for a multi-member LLC.
You’ll also need your EIN, which you should have received when setting up your LLC. Once the account is set up, you’ll be able to transfer money from the business account to your personal account or the personal accounts of your partners at any time.
While the owner’s draw gives LLC owners a lot of flexibility in payments, it’s important not to overpay yourself and your partners. Leave enough money in your bank account to cover tax payments for the business.
How Does Employment Tax Work For LLC Owners?
While LLCs have the liability protection of a corporation, they maintain the tax benefits of a sole proprietorship. This means your LLC profits are considered personal income. Because of this, you won’t have to pay a personal tax and a separate business income tax. However, you will have to pay 15.3% self-employment income taxes, which get divided into social security and medicare taxes.
As businesses grow, some owners find their tax returns to be higher after converting from an LLC to a corporation. While this may lead to a higher tax return, you can no longer pay yourself or your business partners through an owner’s draw.
Instead, you’ll pay each LLC member a salary. While this limits flexibility, it’s a good option for well-established businesses that are generating consistent revenue streams.
Other Business Structure Options
There’s no one-size-fits-all when it comes to entrepreneurship. Some business owners are able to succeed for years as a sole proprietorship. Others want to be structured as a corporation from day one.
LLCs are a perfect compromise between the sole proprietorship and incorporation, allowing you the simplest and most flexible way to pay yourself. But chances are, no one knows your company as well as you. So weigh all your options and choose a structure that meets your needs.
Interested in learning more about other types of business structures? Check out these articles next:
Sole Proprietorship: Learn the Pros and Cons
How to Start a Nonprofit and Incorporate It in 6 Steps
How to Start a Business: 10 Steps for New Entrepreneurs
Source: Cosmo Politian