There are roughly 28 million small businesses operating in the United States, according to data from the Census Bureau. Running your own small business certainly has its perks, such as the ability to be your own boss, set your own hours, and control your financial destiny. But it can also prove challenging for newcomers who are unfamiliar with the laws regarding business operations. One such question that’s often raised by new business owners is how to yourself — something that we’re going to tackle in today’s blog post.
Unfortunately, paying yourself as a business owner isn’t as simple as transferring money from your business account to your personal bank account. If you are an officer of a corporation, for instance, federal law states that you must receive checks like a regular employee, complete with withholdings for Social Security, Medicare, federal taxes and state taxes.
Owners of an S-Corp business must also receive paychecks with withholdings for Social Security, Medicare, federal taxes and state taxes. However, one of the key differences is that S-Corp business owners are allowed to draw additional money beyond their standard paychecks. This is done in as a draw or distribution, and checks written for them are not subject to the same withholdings as standard paychecks.
Of course, sole proprietors are given the freedom to pay themselves without the normal constraints of withholdings. Since there’s no corporate entity in a sole proprietorship, all revenue is acquired in the business’s owners personal account. This eliminates the otherwise confusing process of having to write a paycheck with the respective withholdings. Sole proprietors can simply use their earned money just like any regular money they have.
The downside to running a business as a sole proprietor, however, is that it doesn’t offer any type of liability protection. Unlike corporations, the owner of a sole proprietorship has no protection for his or her personal assets. In other words, if a disgruntled customer sues you, they could potentially take your personal assets, assuming the court sides in their favor. This is why many experienced business owners operate under a corporation or limited liability company (LLC), both of which offer liability protection.
Hopefully, this will give you a better understanding of the ways in which small business owners can pay themselves. The bottom line is that you need to understand your business entity type, at which point you can choose the best way to pay yourself.