One of the best parts about being a business owner is that you are the boss of your company. With that said, however, you may find yourself asking: How do small business owners pay themselves? If this question sounds familiar, no worries. Starting a business can come with many processes to get a handle on. The good news is, this article is here to help.
How a business owner pays him or herself ultimately depends on what kind of business structure he or she has set up. When it comes to taxes and legalities, you have four options for structurigng your company. Whichever structure you choose determines how you pay yourself.
1. Drawing in Sole Proprietorships
For most small businesses, the United States Internal Revenue Service does not consider the business entity to be separate from the business owner. As such, profits are technically income for the individual who owns the company. As such, to pay yourself if you own sole proprietorship or limited liability company, you need to draw the mone from your profits and mark it down on a balance sheet. Maintaining separate bank accounts can be helpful.
2. Guaranteed Payments in Partnerships
Anoother kind of business structure is a partnership. For business owners who are in partnerships, it is a partnership agreement that determines how the IRS splits the profits, but it is the operating agreement that determines each partner’s individual salaries. As a result, each owner receives a “guaranteed payment” that is separate from the profits which each also calculates for taxation purposes.
3. Regular Salary and Distributions in Corporations
With corporations, there are two options for companies; a business owner may for an S corporation or a C corporation. Like sole proprietorships and partnerships, these entities also pass tax liabilities on to members. With that said, shareholders in an S corporation generally receive both a regular salary that comes from the company’s payroll. In addition, they typically receive payments through distributions as well. With C corporations, payments for members and partners occur the same way.
At the end of the day, business owners may pay them in one of three different ways, depending on which of the four business structures their company falls under. If you are a budding entrepreneur, you can use this information to help you figure out how you can pay yourself with your future business. Which business structure sounds best for your company?