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Paying Yourself

PAGE 2
The Tax Factor

For example, had you formed a C-corporation, it'd be easier to retain money within the corporation, because money retained within the corporation wouldn't be subject to employment taxes (leaving more money in the corporate piggybank), and it might be taxed at a lower corporate tax rate. Removing larger amounts of money from a C-corporation, however, would pose a problem. Had you formed an S-corporation, you could have divided your earnings between salary and dividends, essentially lowering the Social Security tax paid on the amount removed from the corporation. However, S-corporations have other downsides. (Read my S-Corporations Demystified article for more details.)

Overall, an LLC taxed as a sole proprietorship isn't a bad choice for someone who wishes to remove money from a company. Money retained and needed by the business for operations might be more heavily taxed than it might have been in other business structures, partially due to self-employment tax and, possibly, also due to being in a higher personal tax bracket than a C-corporation would have been in. (For more details on the pros and cons of choosing a business structure, see Idea Cafe's Business Entity Chart.)

Taxation isn't the only factor to consider when paying yourself money from your business..... continued

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