It’s a great feeling to be in business for yourself as a business owner. The details, however, can be complex. For business owners, how you pay yourself (and your taxation) depends upon the legal entity (business type) around which your company is organized. A little advanced research is a good idea to know how to do every little task.

Here’s our overview of how business owners get paid: 

• Owner’s Draw: This is how sole proprietors (and owners of single-person LLCs or state-designated Limited Liability Companies, which are considered “disregarded entities”) pay themselves. The Draw will show up on the business’ Balance Sheet. 
• Guaranteed Payment: This is how partners are paid in a business partnership, and these payments are listed on the P and L (profit and loss) statement. Partners may use another option for payment, called a Distribution, noted below.  
• Salary: Corporations pay the principal(s), often the business’ owners/founders, via a Salary. The Salary is listed on the corporate Balance Sheet of the C-Corp or S-Corp. 
• Distribution: Corporations (both S and C) and partnerships also have the option to be paid via a Distribution, shown on the company’s Balance Sheet.  

Choose Your Business Entity and Busines Owner’s Payment Method Strategically

As you can see, how you set up your business type, and pay yourself, are big decisions. Each of these business entities, sole proprietor, LLC (limited liability company, a state designation), partnership and corporation (S or C), are taxed differently. The way each entity pays its owner(s) affects whether it is recorded on the P and L Statement or the Balance Sheet, and can also have tax consequences.

Business owner payments amounts are also important. For instance, if the owner of a company pays themselves only a tiny amount, hoping to save on taxes, the IRS may frown on this. Since each individual situation is unique and the options fairly complicated, we encourage you to consult with your tax advisor when you make business entity and owner pay decisions.

Business owners, when you need options for financing to start up or run your business, talk to the experts at Increase Lending. Contact us today.