(uplifting music)
- Whoa, new intro, pretty big deal.
Hi everyone.
I'm Attorney Aden Durham
with 180 Law Co. in Denver, Colorado
and welcome back to All Up In Ya Business.
This episode of All Up In Ya Business
is going to be all about paying yourself.
I've done a few videos in the past about paying yourself
in a single member LLC, and one in a multi-member LLC.
And I want to kind of revisit some of those topics
and talk about it again,
but in a bit of a broader sense
and with some new thoughts and ideas thrown in there,
just for funsies, okay?
When it comes to paying yourself as a business owner,
there are kind of three different versions
of paying yourself.
There's a draw, or a distribution.
I use those two terms, interchangeably,
draw, distribution, means the same thing.
There's a salary, and then there's a dividend,
which is also kind of similar to a draw and a distribution,
but applies differently in different contexts.
So how you pay yourself, whether you take a distribution,
a salary, or a dividend,
it's going to start number one,
at your entity or business type
and your tax classification of your business.
If you're in a sole proprietorship, or partnership,
or an LLC, owners of these types of businesses
take distributions or draws,
that's the term for paying yourself,
is taking a distribution or a draw from the business.
If you're a sole prop, a partnership, or an LLC,
Some people will call this a salary
if let's say you have a distribution set up
on a regular basis and in a set amount,
some people consider that a salary
just because it occurs on a regular basis
and in a set amount.
That's not really the same thing
of what I'm going to be talking about as the salary,
that's still a distribution,
it just happens to be consistent in scheduling, or amount,
or whatever the case may be.
Still really considered a distribution or a draw.
In a sole proprietorship in particular,
you can quite literally pay yourself,
however, and whenever you want.
You don't have anyone else that you have to agree with,
such as in a partnership or in a multi-member LLC,
you don't have any real legal restrictions
on paying yourself because you're a sole proprietorship.
So really whenever you've got money in the bank
and you want to pay some of it to yourself, you can,
and assuming you've got the money in there to pay yourself,
you can take it and pay yourself whenever you want.
And pretty much the same goes for partnerships
because partnerships are just formed
when two or more people decide to do business together.
There's no real legal requirements
on when or how partners get paid.
They take distributions.
The only difference from a partnership
and a sole proprietorship is that the people involved,
the partners have to be in agreement.
Now this is going to depend on
if you have a partnership agreement
and if there are any specific requirements there,
but if we're pretending just two people, 50/50 owners
in a partnership, they can mutually decide.
Here's when we want to take a distribution, here's how much.
And then if they are 50/50, normally those distributions
are going to be proportionate to their ownership.
So if they take a distribution
of a hundred thousand dollars,
each partner is going to get 50 thousand dollars
to correspond to their 50% ownership.
Now, LLCs function in a very similar way
as a sole proprietorship or a partnership,
except that you have to also start
at your operating agreement.
Typically in a multi-member LLC,
the operating agreement will have some guidelines
or some instructions
on when the members can take distributions.
And you also need to keep in mind,
adequate capitalization of your LLC
for personal liability protection
and to avoid piercing the corporate veil.
And then finally, in an LLC,
you also need to take into account
any particular state requirements.
Now they're going to vary depending on your state,
but for example, in Colorado,
we've got a statute that prohibits LLC members
from taking a distribution, if after the distribution,
the LLCs liabilities are going to outweigh
the assets of the LLC.
So aside from those particulars,
the concept behind paying yourself
and taking a distribution in an LLC
is the same as it would be in a sole proprietorship
or a partnership.
Now, an S Corp, which is either an LLC
or a corporation that has made the tax election
to be taxed as an S Corp.
An S Corp is fun because it gets a mix
of a salary and a distribution.
The owners of an S Corp are required to pay themselves
a reasonable salary, which is a term that the IRS created
and what constitutes a reasonable salary
is going to depend on your business
and what you do for your business,
but in an S corp you would pay yourself a portion
via this reasonable salary.
And then anything on top of that,
that you receive is a distribution.
So as an S corp, you're receiving income or payment
from your company as a salary, and then as a distribution.
And then finally in a C Corp,
which is a corporation that's taxed as a C Corp
or an LLC that's taxed as a C corporation,
the shareholders are going to receive a dividend,
which is a very similar to a distribution
in that it's, you know, payment of the profit
or the retained earnings of the corporation,
but the officers or the shareholders
who are actively playing a role in the company.
So let's say you are a 50% shareholder in your corporation,
but you're also the CEO.
You're typically going to receive a salary
as your position as CEO.
And then you might also receive a dividend payment
as shareholder.
Now let's talk about the actual method of paying yourself.
Like, how do I actually pay myself?
Again, it's gonna depend on your business type
and all of that stuff.
In a sole proprietorship, a partnership, or an LLC,
wherever you're taking distributions,
you can pretty much pay yourself however you want.
You can pay yourself by just transferring
from your business bank account
to your personal bank account.
Or you can write yourself a check for it,
or you can take cash out of your business account
and then deposit it into your personal account.
It doesn't really matter.
You can pretty much pay yourself
in whatever method you want.
In an S corporation,
again, you're going to take a salary and a distribution.
And so with the S corporation, when you take that salary,
you're being paid as an employee of your company.
And so that salary should be paid through payroll,
whether you use a payroll processing company,
or if you have software that does payroll processing,
that salary should be paid on a actual payroll check
that has taxes withheld from it
just like when you were working for some other company
as a W two employee.
Now you're working for your own company as a W two employee,
and you're receiving a salary on your payroll check,
and then everything else that you take on top of it,
which is the distribution, can again be paid
pretty much however you want to
and to pull back the curtain,
that's exactly what I do for my own business.
My business is an LLC taxes and S corporation.
So I take a payroll check once a month
in the amount that my accountant tells me I need to,
I just let her do the work
and tell me what I need to pay myself.
But so a once a month,
I get my check direct deposited into my personal account,
but I get a pay stub that says
the amount of taxes that were withheld.
And then I get a W2 at the end of the year,
just like I would as an employee anywhere else.
And then on top of that paycheck that I pay myself,
if I need more money,
or if there's money left over in the business
and I want to take a bonus or something,
I just transfer that to my own account.
And that's my distribution.
And then C Corps work pretty similar to an S corp.
Again, if you're taking a salary,
you're considered an employee
and so that should come through a payroll check.
And then for the shareholders,
the dividends is going to be a cash or check payment,
but no taxes are taken out beforehand or anything like that.
Finally, let's talk about how much you pay yourself.
Now, obviously, well, hopefully this is obvious,
but if you're in a partnership or a multi-member LLC,
or if you have other business partners,
if you're not the only person involved,
then you need to confer with the other owners
to determine how much to pay yourself.
But if you're a sole proprietorship,
you really just decide how much you want to pay yourself.
And that's fine.
And then the second obviously
is that your business needs to be generating
some kind of revenue to pay yourself.
If your business isn't making any money,
it's going to be pretty difficult to pay yourself.
There are a lot of books, and blogs, and coaches,
business coaches, budgeting coaches
that have different theories or different ideas
of how much you should be paying yourself,
or how to portion out revenue,
to decide how much to pay yourself
and these ideas and these theories are across the board.
They're all different.
But the overarching idea typically
is that from your pot of revenue,
you want to have a portion of it
that will pay expenses and overhead,
a portion that's going to pay taxes
because at some point
you're going to have to pay taxes on the revenue,
and then a portion
that is going to be paid out to the owners.
So when you're deciding how much to pay yourself,
what most people encourage
and the practice that most people take
is that you've got your revenue.
You've got your one big amount of revenue,
whether it be for the last month or the last few weeks.
And then you portion that out
to cover those three categories
of your expenses, taxes, and paying yourself.
So let's say you're a single member LLC,
and you want to take distributions two times a month.
So what you can do is schedule a time twice a month,
where you look at how much revenue
your business has generated since the previous distribution.
So since that last time you did the calculations,
figure out the amount of your total revenue,
and then divide that up.
For example, 40% of your revenue can go to overhead.
40% can go to paying yourself.
And then the remaining 20% can go to taxes.
Now, those percentages and their proportions,
again, it is completely dependent on your business,
your business's revenue, your overhead,
how much you need to pay yourself and all of that.
So I can't tell you which way everyone should do it.
Like I said, there are a ton of different ways
to think about this and a ton of different ways
to go about figuring out percentages and proper allocation.
So I encourage you guys to research and read blogs,
read books on the topic
and figure out what works best for your business.
I recently got really into Profit First.
Profit First is a book by Mike Michalowicz.
I don't know if I've said that right.
I don't think anyone knows how to pronounce it,
but it's a book.
I just picked it up a couple of weeks ago,
started reading it
and I thought it was great ideas behind it.
So I started implementing it into my business.
And it is the same kind of idea
of proportioning out your revenue,
except what is different here
is that the author encourages to actually use
different bank accounts for each of that.
So you have one bank account where income goes into.
So all of your revenue goes into this one bank account.
And then from that bank account,
you put a portion into your operating expense bank account,
a portion into your tax bank account,
a portion into your owner's compensation bank account.
And then what's fun is you also want to put a portion
into a profit account,
which is pretty much like a savings account
and where you hold onto extra.
So you're paying yourself,
but you're also making sure
there's some profit being left over,
which can turn into an emergency fund or a rainy day fund,
or it can be your bonus fund,
where at the end of a quarter or a year,
the author recommends every quarter,
every quarter you take 50% of what's in that profit account.
So you get a bonus and I've been doing this
and it's for the last two months maybe.
And it's been working fantastic for me
because I get to pay myself.
I'm pretty much ensuring that I'm paying myself
every couple of weeks
and I'm assuring that I'm putting some aside
and saving it for business and for, you know,
if I want to invest in something new for my business,
or if I want to take a vacation
and have a bonus from my business, I can do that.
So I'm not affiliated with this book or with this author.
I'm not getting anything out of this.
I just think it's a really great book
and a really great theory.
You know, it may not work for everybody
and it may work for everybody, I don't know,
but read that, read other books, research,
and talk to other business owners and see what they do,
because really there's no one right way of doing it.
It all completely depends on you and your business.
So when, when it comes to paying yourself,
it starts with your entity type
and how the business is taxed,
making sure there are no contractual or legal requirements
with an operating agreement
or state law saying what you need to do.
And then just determining how much
is the right amount to pay yourself
so that you can, you know,
live and pay your bills for yourself so you're not homeless.
That's all for this episode.
If any of you have read a really great book,
or if you have any great tips or ideas
of how to pay yourself
or how to figure out the amounts to pay yourself,
I would love to hear feedback and input from everybody else.
So please, I encourage you to comment
and share with the class.
If you're in Colorado
and are looking for some help with your business
or not sure how you're supposed to be paying yourself,
you can contact me all my contact info
is in the description below.
Thank you all so much for watching.
I'm Aden Durham and I'll see you next time.