Should I take an owner's draw or salary from my LLC?

September 26, 2008

From:  Dina
Date:  27 Jun 2008

I am a partner (member) in an LLC. The LLC files Form 1065 (U.S. partnership income tax return).

Can I take an owner's draw, or should I pay myself a guaranteed payment? I understand that an owner's draw is not taxable on my individual income tax return, gut guaranteed payments are.

If I can collect an owner's draw, is there a limit of how much?

Thank you,
Dina

Answer

Date:  02 Jul 2008

Hello Dina,

A guaranteed payment can be for different purposes. The one you are talking about is for a partner's salary. A salary is usually arranged when one or more partners are active in the business and others aren't.

The LLC/partnership takes a tax deduction for the guaranteed payment and the member/partner who receives it reports it as income. The amount is reported by the LLC/partnership to the member/partner at Part III, line 4 of Schedule K-1.

The members/partners share taxable income of the LLC/partnership, after the guaranteed payment deduction, is taxable on their individual income tax returns. The amount for each member/partner is shown at Part III, line 1 of Schedule K-1.

Draws for LLC members may be legally limited because LLCs have limited liability protection. You should discuss this with a business lawyer.

Consider hiring a tax return preparer to prepare your income tax returns and for tax advice. That's our business!

Good luck!
Mike Gray

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