How does a payroll work for owners of an LLC?

I am looking to start an LLC and am wondering how pay works. I am hoping to bring
in much of the income directly to the business and simply pay the owners and
myself out of the earnings every month, but keep the rest in the business
account. Is this how an LLC works? For tax purposes i know that LLC have a ‘pass
through’ nature, but how does that work with 4 owners? Would the business file
it’s own income tax and the owners pay their personal portion of income tax? But
how would you avoid double taxation?

Thank you,


Asked on May 11, 2016 under Business Law, Virginia


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

1) "Pass through" means that the LLC does not pay its own taxes and the LLC is not separately taxed, though it does need to file the proper tax return (a partnership return) for informational purposes. 
2) When the profits (or losses) pass through the LLC, what happens is that they are distributed among the owners proportionate to their ownership interests. If there are four equal owners and $300,000 of profit, each one has $75,000 attributed to him or her for tax purposes. If there is one majority (51%) owner, two 20% owners, and a 9% owners, the $300k is attributed to them $153k, $60k, $60k, and $27k. Etc.
3) Whatever the LLC profit or loss was that passed through the LLC to an owner, that amount is added to his or her other income on the tax return and he/she pays taxes on it. If Jane Owner's share of the LLC's annual profit is $75k. and she is also a  graphic artist who earns $60k per year, her total taxable income is $135k.
4) LLC owners don't have to take out all the profit as cash: they can actually take distributions of cash from the company in any amount that the majority of ownership agrees to, but the cash is then distributed proportionately. Example: say there are 3 owners, each owning 1/3 the business. Say the company makes $300k over the year. 2 of the 3 owners (a majority) vote/decide to leave $90k in for operational expenses and capital investments and distribute the other $210k; each owner then gets $70k. Or the LLC operational agreement can delineate how/when/how much money is taken out.

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