www.startupnation.com

by entrepreneurs, for entrepreneurs

• Join - It's Free!
• Log in

My StartupNation

Drawing a salary as an entrepreneur - Q & A

Tustan calls in from California and asks how does he actually get a salary out of the profits from the LLC that he’s hoping to form?

Rich Sloan: We've got Tustan out of La Quinta, California.  Welcome to the show.

Tustan:  Hey, how are you guys doing?

Rich Sloan:  Doing great.  How can we help?

Tustan:  Well, I'm very interested in starting a single-member LLC.  And I've done a lot of research and there's a lot of --

Rich Sloan: Now hang on one second, Tustan.

Tustan:   Sure.

Rich Sloan:  Now are you currently working for someone else?

Tustan:  Absolutely.  Actually, I work in city government.

Rich Sloan:  There you go.  You fall right into that category.

Tustan:  Yeah.

Rich Sloan:  Okay.  Go ahead.

Tustan:    Okay.  So I've done a lot of research on it and, you know, there's a lot of information on how to get -- how to get it started and how to fill out the forms and where to send them.  But once I incorporate, you know, I'm actually looking for how do I begin taking a salary off -- when I make my sales.  There's no information on that whatsoever that I've found.

Jeff Sloan:  You said once you incorporated.  Are you going to start a limited liability company or a corporation?

Tustan:   An LLC.

Jeff Sloan: An LLC.  So you won't actually be incorporating because an LLC is not a --

Tustan:   Okay.

Jeff Sloan:  -- a form of a corporation.  It's an alternative to a corporation.

Rich Sloan:  Jeff's not going to let you get away with those kinds of mistakes.

Tustan:  Yeah, you gotta, yeah.

Jeff Sloan:  Well, as we know, there's lots of advantages to doing one over the other.  The LLC is our favorite form of new business start-up.  And it just offers a lot of advantages.  Now the question is, How do you take a salary from an LLC?

Tustan:   Correct.  Yeah.

Jeff Sloan:  Well, are you talking about -- now when you say, How do you take the salary?  Are you going to have revenues coming into the LLC or --

Tustan:  Correct.  Yes.

Jeff Sloan:  -- are you -- you are.  So your salary will be funded through the revenues, not through investment capital.

Tustan:   Okay.  Yes. 

Jeff Sloan:  Okay.  Well, the way -- you just pay yourself a salary as you would in any other entity.  There's no complication or issue whatsoever.  You pay the salary, make sure you pay the employer's portion of the taxes due according to how any other employer would have to do that.

Tustan:  Okay.

Jeff Sloan:  And everything's totally cool.

Tustan:  Okay.  So I wouldn't have to have any kind of formal agreement with the company in the single member, per se?

Rich Sloan: You don't -- there is something that you can form called an Operating Agreement.

Tustan:   Okay.

Rich Sloan:  Which can spell out details such as salary and other requirements and rules/regs of the way the company will operate.  But many times that becomes relevant when you either are going to bring other people into the business as business partners and/or employees.

Tustan:   Okay.

Rich Sloan:  And in addition, in a scenario certainly where you would have investors.

Tustan:  Okay.

Rich Sloan:  And then it may be beneficial to you to have that kind of structure and track record in the event that some day you want to sell this business.

Tustan:   Okay.

Jeff Sloan:  Tustan, are you -- do you have anticipate having investors ever in the business?

Tustan:  Well, it depends, I mean, on, you know, the growth.  So --

Jeff Sloan:  Yeah.

Tustan:  I mean, right now, I mean, it's out of pocket and it's -- you know, it's a very limited amount of money that I'm going to be starting off with so --

Jeff Sloan:  Yeah.  Well in the operating agreement, what you'll do currently -- you should have a basic little operating agreement.  You will assign yourself as the one and only manager of the entity.  The manager of the entity gets to make all the decisions for the entity, including the setting of salaries.

Tustan:  Okay.

Jeff Sloan:  You know, should investors come into this entity, they're obviously going to want to talk to you about that.  They'll probably, at least, want some measure of control over what salary you pay yourself, because obviously they get their distributions after all operating expenses are paid.  Salaries are operating expenses.  So they're gonna want to make sure there's a handle on that and that all the money coming in doesn't go out in salary to you.  But for right now there's no issue whatsoever.  You're the manager.  You're the sole member.  You get to do whatever you want.  Just make sure you pay those employment taxes on schedule, and you'll be all set.

Tustan:   Great.  That's fantastic.

Rich Sloan:  Check in with us, Tustan.  Let us know how it goes.

Tustan:  I absolutely will.