Congratulations, you've started a business. You've figured out how to get an LLC, and now you want to know what to do after you form an LLC.
In this episode, you'll discover how to pay yourself as a business owner with a single-member LLC and how to make sure that you profit first in your small business.
You're watching the Online Business Clinic, the place to be to build a profitable portable online course business, one that allows you to create a lifestyle and financial freedom, aka building true wealth.
You're tuning into episode 6 of a multi-part small business 101 training series. Be sure to go back and watch the first few episodes by accessing the link in the show notes.
I am not a licensed attorney or CPA, just a small business owner who's figured a few things out and shared my insights along the way.
This episode is for informational purposes only; please consult your local professionals to ensure that you're making the best decisions for your unique small business.
Separate Your Business Finances From Your Personal Finances
Now that you're a formal business entity, it's time to set up your finances properly by taking your new EIN (employer identification number) to the bank and establishing separate bank checking and saving accounts.
You've gone through the efforts of legally protecting your business by filing an LLC; now, it's time to honor that protection by separating your daily living expenses from your business operating expenses.
This step is crucial if you're going to properly pay yourself as a business owner with a single-member LLC.
Separating your business finances from your finances will save you from a major headache down the road.
Create & Follow A Cashflow System
Traditionally business owners will take their gross sales, subtract expenses and consider the remaining balance profit.
The problem with this method is that it's our natural behavior to look at the bank balance or the credit card availability limit and make financial decisions that appear to be available.
This method tends to lead to increased overall spending and often stress. Especially come tax time.
A client of mine who generates on average 3-5 million years accidentally got himself into a pickle at tax time using the method.
Suddenly, he was responsible for paying a 6-figure tax bill but didn't have the cash on hand and scrambled to make new sales quickly to avoid penalty.
Once I introduced him to the Profit First method, my client now follows the cash flow structure and has much more peace of mind when it comes time to making business finance decisions.
He also has a sizeable profit that he can pull from on a quarterly or annual basis to be used as a bonus to spend on something fun for himself.
In his book profit first, I initially learned the Profit First method from author and business coach Mike Michalowiz. All income is waterfall into specific accounts using a fixed percentage for each.
Income > Profit > Owner’s Compensation > Taxes > Operational Expenses
The focus here is to pay yourself first.
There is a substantial physiological boost when you choose to pay yourself first vs. paying expenses or taxes.
The recommended target allocation percentage (TAP) are as follows:
Owner's Compensation 30%-50%
Operational Expenses 45% or less
Using the Profit First method activates the Parkinson's Law, where when given less, you'll use less. As a small business owner, it's a delicate balance to use what you need to steadily grow the business while simultaneously keeping your operational expenses as low as possible.
A simple rule to follow when making business financial decisions is if you can't pay for it, you can't afford it. Remember, it's about being resourceful, not your resources.
Create and follow a cash flow system - Profit First or otherwise and stick to it.
Get your copy of Mike's book for a more in-depth breakdown of how and why to use the Profit First Method.
For a quick recap, how to pay yourself as a business owner, specifically as a single-member LLC.
Take A Regular Member Distribution
To pay yourself as a small business single-member LLC business owner. You can do this by simply writing yourself a check or making an ACH transaction from your business account to your checking account, known as a member distribution.
If you're operating your business as a true single-member LLC, there is no need to set up payroll. As a single-member LLC business owner, you're seen as a shareholder of your business and will be taxed on your net income with self-employment tax at the rate of 15.3%.
As a single-member LLC, the government views you as both an employee and an employer of your own small business. Therefore you're taxed for social security at 6.2% and Medicare taxes of 1.45%, which equals 7.65%.
Your net income is the total of your gross income (what your business brought in) minus your operating expenses (what your company put out). Your net income is also known as your taxable income.
In the previous episode of this small business 101 training series, I mentioned how you could file your taxes as S-Corp as a single-member LLC business owner. You can do this by completing two forms that your CPA can help you with.
Doing so may have tax benefits.
Typically this is most beneficial for small business owners who make over $40,000 in net income.
Again, consult your local tax advisor.
To pay yourself as a single-member LLC, you can take regular distributions from your business account via paper check or ACH transaction to your bank account.
Step 1: Separate your business and personal finances using your EIN to establish good business bank accounts.
Step 2: Establish a cash flow system by predetermining a target allocation percentage that you'll pay yourself.
Step 3: Pay yourself by taking that specified percentage as a member distribution from your business bank account and sending it to your checking account via written check or ACH transaction.
Now I'd like to hear from you. Did you find this episode helpful? If so drop a comment below. Doing so helped encourage me to keep producing weekly episodes for you, and I appreciate your support.
In the next episode, we're going to talk about how you can set up your client-attracting system so that you can generate more income for your business and, in turn, be able to pay yourself more.
Get your copy of Profit First here:
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