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How should a small business owner be compensated

Updated: May 4, 2023


When deciding how to compensate yourself as a business owner, it's important to consider both the business structure and the method of compensation. Here is a brief overview of how the business structure can impact your compensation options:


• Sole proprietorship: As a sole proprietor, you are the only owner of the business, and you are not considered an employee. You can take money out of the business as owner's draws, but you cannot pay yourself a salary.


• Partnership: As a partner in a partnership, you can take money out of the business as owner's draws, but you cannot pay yourself a salary unless you are also an employee of the partnership.


• LLC: As an LLC owner, you can take money out of the business as owner's draws or pay yourself a salary. If you choose to pay yourself a salary, you will need to set up payroll and withhold payroll taxes.


• S Corporation: As an owner of an S Corporation, you are considered an employee of the business and must pay yourself a reasonable salary. You can also take money out of the business as owner's draws, but the amount of owner's draws must be reasonable based on the business's profits.


When choosing between owner's draws and salary as a compensation method, it's important to consider factors such as payroll taxes, retirement savings, and personal financial goals. Additionally, the specific rules and regulations regarding compensation can vary by state and business structure, so it's always best to consult with a tax professional to determine the best compensation strategy for your specific circumstance.

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