How to Pay Yourself From Your LLC

You've heard you aren't supposed to mix your business and personal money... but then how do you pay yourself from your LLC? Tune in for my take on paying yourself from your LLC and some tips on making sure you keep that legal wall between you and your LLC in place while you give yourself a paycheck.

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Episode Transcript

Happy Valentine's Day. I've never been a big Valentine's Day person, but today on the podcast I wanted to talk about money, and I just realized that that's kind of fitting because paying yourself from your business is an act of self-love. It's an act of self-care. It isn't necessary. And so that's what we're going to talk about. We're going to talk about how to pay yourself from your LLC. Because I think people get wrapped up in the mechanisms of it and wanting to make sure they're not breaking those rules about combining business and personal money and way overcomplicate things. So we're going to break it down so that it's nice and simple and you can feel confident taking money out of your business to pay yourself because you're your business's biggest asset, your biggest resource, and you need to be compensated for that.

So let's do it. Hey, I'm Amy Nesheim, licensed attorney for online business owners and founder of my own business, Artful Contracts. You're listening to Legal Made Easy, the show that makes the legal aspects of online business easy to understand and implement so you can grow your business with confidence knowing you've got it all covered. Let's dive in.

Okay, first thing, if you don't have an LLC yet, that's okay. Keep listening. I think this episode will still be valuable for you. But if you do have an LLC, then great, because that's what we're talking about. We're talking about how to pay yourself. The first objection that I hear to this is well, my business doesn't have enough money to pay me. And yeah, I get that. But here's what I have to say to that. We're gonna back up and do a little bit of story time.

So when I started my business, I haven't talked about this very much because I think, well, at the time I was embarrassed and I didn't want to, I don't know, I just didn't want to use this story uh in business. But when I started my business, I had just quit my law firm job because I hated it and was miserable. And at the same time, I got divorced. I was 28. I was under 30, married and divorced already. And I think I was I had to get over the whole like, I don't know, mind drama around that before I could really talk about it. But when I was starting my business, that means that I didn't have a job. My ex took all of our savings as like his half, and I got the house as my half. Now, in hindsight, that was a great deal for me because my house is way more valuable than the amount of savings that we had. But at the time, it meant that I had no job and still had a mortgage and was just starting my business. So pretty scary, right? That was a wild time for me.

But basically, that meant that I did not have a choice but to take money out of my business from day one. And I didn't have a lot of money in my business, but I had to take out every cent that I possibly could because I had to pay my mortgage. And I did other things. I rented rooms in my house. I was very lucky to have the house and be able to do that. Um, and I took like random freelance work and put a lot of startup costs for my business on credit cards, things like that. You know, you do what you gotta do. But of course, even then, I had the expenses that go along with running a business. So I had to pay my website, I had to pay my insurance, all of the softwares that go along with providing online services and courses. But of course, I didn't have, you know, a ton of revenue coming in yet because it was brand new.

So I guess all of this to say that I understand the balancing act of needing to take money out of your business, needing to put money into it to make sure that it keeps growing and managing that kind of tightrope situation.

So I did a lot of research, I did a lot of learning in that first year of how to manage all of this, how to run a business, all of that stuff. And I was, I think I was very lucky to have found, I don't even know how I found it. I think somebody I followed recommended it, but I found the book Profit First by Mike McAllowitz, and I highly, highly recommend you read it, whether you're in the beginning of your journey or a little bit later on. Uh, and it talks about this concept of paying yourself. And Mike's premise is basically the normal calculation for profit is revenue minus expenses equals profit. And he flips that on his head and says, it shouldn't be that way. We should be budgeting for profit and fitting our expenses in in the rest.

So the his calculation then is revenue minus profit equals the amount that you have that you're allowed to have for expenses. It's kind of a budgeting tool for business owners to make sure that you're not going overboard on your expenses and that you always have money for yourself to come out of your business. Even if it's just, and he does all this based on percentages, which I found really helpful because you know, revenue fluctuates, obviously. It's hard to predict, especially at the beginning. So doing your calculations of what you should pay yourself based on percentages instead of based on dollar amounts is really helpful for those fluctuations because the percentage can stay consistent, even if the dollar amount changes.

So even if you only can take out 1% from your business, even if all you have left over is 1%, you can at least start there, budget yourself to have 1% left over, and your expenses are the other 99%, and then you can build up from there. The next month you take 2%, the next month you take 3%. And I love that approach, the approach of thinking about your business expenses as something to budget for and to control rather than something that gets out of control, uh, for two reasons. One is Parkinson's law, which is, you know, the concept that what you use will expand to fit the resources that you have available. So it's first was it was in time. You know, the amount of work that you have expands to fill the time available to you, but it's also like the amount of expenses you have expands to fill the amount of revenue available for it. So if you limit the amount of the pool of money that you're allowed to spend on expenses, then they won't expand outside of that. I mean, they might, but you have it's you're more intentional about it. There's at least intentionality behind it.

And then the other reason is because I am a firm believer in paying yourself from your business because you are your business's most valuable asset. You are the thing that makes it run. And so you cannot be in survival mode economically just because you need to pay for one more software. A business is not a business unless it is paying you. At a certain point, if you never pay yourself, it just becomes an expensive hobby and expensive in terms of the time that you put into it as well as the money you put into it. And I know, of course, giving yourself leeway, giving yourself grace for taking time to reach that state of profitability, yes, that's absolutely okay. And I think we don't talk about that enough in the online space. How much? Yes, we are so lucky startup costs are super low compared to, you know, opening a storefront or a salon or a brick and mortar anything.

The opportunity is so much more accessible than it used to be when you had to actually have a storefront to start anything. But there are still costs involved, there are still expenses, and so it's okay if it takes time to get there. But once you get there, don't just let it keep going. Don't just let your expenses continue to expand to fill all the available revenue because you have to pay yourself. And if you're in survival mode economically, if you're not paying yourself, if you don't feel like your time is being valued monetarily, economically, if you aren't giving yourself compensation for the amount of work that you're putting into it, then you're not putting your best foot forward. You're not allowing yourself to bring the most to your business. You can put more into your business if you feel supported by it. And of course, there's more than one way to feel supported by your business.

For me, it gave me time freedom, which is not something I had at the law firm. And that is one way that I feel supported by my business. But I also feel supported by the fact that I was able to pay my mortgage and didn't have to sell my house and build that savings back up that I lost. And that support, paying myself, makes me able to put my best foot forward to put all of what I have into the business. Because we have this symbiotic relationship where you support the business, the business supports you. If one of those legs falls out, you're not standing anymore.

All right, so that is that's my philosophy on paying yourself. Basic bottom line, do it. Pay yourself from your business, you deserve it, you've earned it. But practically speaking, how do you do that, especially if you have an LLC? Here's the answer. Probably simpler than you thought. There is no specific method of transfer or specific software or payroll system or anything that you have to use. You can just, if your accounts are linked at the same bank, you can just do a transfer, you do an ACH transfer, you do a direct deposit, you write yourself a check. It literally doesn't matter. I wouldn't recommend using Venmo. I'm just throwing that out there. But you know, the easiest way to do it is just an ACH transfer, just a bank-to-bank transfer. The mechanism, the method of moving the money is not what's important. And I think people get hung up on that. What is important is that you have a consistent system for deciding when and how much you pay yourself.

And like I already mentioned, at the beginning, the system I like to use was Profit First by Mike McAllowitz. Go read the book. It's great. Actually, if you're a listening type person, the audiobook, he actually narrates it himself. He reads it. So I like when authors do that because you feel like you get to know them; you get to hear their words in their words, the way that they would express it. So I really like that.

But, anyways, the important thing is that you have a specific, consistent system for choosing how much and when to transfer your money. And so the way that I like to do that is with percentages, again, because it can be hard to know exactly how much money you're gonna have come in at any given time. So the flexibility of percentages is really helpful because you could pick an amount, and then that might be only a tiny drop of your revenue for that month if you have a great month, or it could be more than you made, right? So I like to use percentages. So it's a percentage of revenue, and you look at the amount of revenue that you brought in in the time period that you're thinking about, and that's how much your paycheck is.

So pick a percentage and pick a specific date. So it could be the first and 15th, it could be every other Friday, it could be every Tuesday. It doesn't matter what it is; it just matters that it's consistent. So to figure out what that percentage is, you can look at your income and expenses recently. You know, if you have a little bit of history, you can figure out what's a realistic amount that you can transfer out of your business without hurting your business. And that really depends on how much you have in expenses and how much you make in revenue and what your profit margins are. But it's probably for service providers, it could be as much as 50% or more. For course creators, it might be a little bit less. Or if you're really in the beginning and you want to be conservative, you know, 5%. Just a little bit, right?

So all you have to do is choose the amount, choose the frequency or dates that you're gonna do this, and you transfer it over. And I recommend you write up a little SOP for yourself. So SOP stands for standard operating procedure. So just write down a document, save it in your accounting folder or your operations folder, whatever it is, where you store all your important info on your LLC, and you just write down your process and you follow it every single time you do this. And then in your bookkeeping, whether it's a spreadsheet or you use QuickBooks, you just record each of those transfers as owners pay every single time you do it.

And so what that does is because you have a specific way of calculating it and a specific cadence to the transfers, it doesn't look like you're just using your business as your ATM because that's what we want to avoid. We want to avoid it looking like you're taking out money randomly just because you had a great day, or just because your mortgage is due, or your rent, or your electricity, or just because you're going on vacation. You want to avoid tying the amounts that you transfer to something going on in your life that is a reason you need money because then it looks like you're just driving up to the business ATM and taking some money out. So having this consistent system makes it clear that you're giving yourself a paycheck and not just taking out money whenever you feel like it.

Okay, two more things I want to add on to this. First, when you're doing this, it's totally okay if you're just starting, if you've never taken money out before or you're not sure what a good amount is, if you've been inconsistent with it, start low and you can adjust it. I wouldn't say every time, but pick a time maybe once a month you're going to look back at your income and expenses and decide if you have a good percentage or if you need to adjust it, or maybe once a quarter. I find that quarters are better because it gives you more time to kind of even out because you might have a good month and a bad month and a good month, and it's hard to know what your overall pattern is just one month at a time. So it's okay to adjust it, but you can also give yourself bonuses. And I like to do this quarterly. So you have your percent that is your paycheck, and then on a quarterly basis, you look back at your expenses and your profit and figure out what your profit is. And then I like to take, you know, 30 to 50 percent of profit and give it to myself as a bonus. The rest stays in the business as tax savings and just general business savings for future expenses, things that come up.

Now, speaking of tax savings, I can't talk about paying yourself without talking about paying taxes. So, yes, it is so important to pay yourself. You should be budgeting to pay yourself, but your profit from your business is not all yours; some of it belongs to Uncle Sam. And as business owners, we have to pay quarterly taxes and we have to save for it and estimate it ourselves. So I've heard too many stories of people getting to the end of the year and having to pay way more in taxes than they thought. So it's a good rule of thumb to save about 20 to 30 percent of your revenue for taxes. And you might as well just do that with your weekly paycheck or at least on a monthly basis. Transfer some money to a separate savings account for taxes. The percentage that you need to save is really dependent on your expenses because taxes are not based on total revenue; they're based on taxable income, which for most business owners is their profit, right? So it might be 30% of profit, or it could be a smaller percent of your total revenue. But if you save 30% of your revenue, you're definitely gonna be safe, and then you can give yourself like a quote unquote tax return when you get to tax time and it's less than you thought, then you can take that extra money as a bonus or put it into savings or, you know, some investment for your business that you wanted.

Alright, so moral of the story: pay yourself. Pay yourself from your business because you deserve it, even if it's just a little bit at first. And it also just gets you in the habit; it gets you in the habit of compensating yourself for your work. It gets you in the habit of thinking about your business as something that provides for you, which is what it should be. Even if, you know, even if you're not somebody who wants to go full-time, you probably want to take something out, right? Like even if it's just to pay for child care or to pay for an extra vacation every year, or even just like your gym membership or whatever it is, it should be paying for something. So take at least a little bit out and increase it as you can. And it gets you in the habit of really analyzing, you know, is this expense necessary? Are there any places that we can cut down the expenses instead of just letting them pile up so that you're budgeting to pay yourself, you're budgeting for your expenses and for taxes.

And as to the mechanism, all you need to do is choose a consistent way to calculate the amount and timing. So that could be a specific percent; it could be a specific dollar amount. I like percents because revenue can fluctuate, and that timing can be whatever you want: weekly, every other week, twice a month, once a month. And don't forget to add in those bonuses when you go back and figure out your profit for a quarter; give yourself a little piece of that because, again, you deserve it, and that's what your business is for.

Alright, friends, thanks for listening, and I'll see you next time.