How Members are Compensated
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Table of ContentsHow are LLC Members Compensated?LLC Compensation: Member-managed vs. Manager-managed LLCsAcademic Research
How are LLC Members Compensated?
Each member in an LLC is entitled to receive a share of profits based upon their ownership percentage. These profits are subject to personal income taxes.
If the LLC is taxed as a partnership, members are not able to receive a salary for their efforts for the company. If taxed as a corporation, members are required to receive a salary for their work for the company.
LLC Compensation: Member-managed vs. Manager-managed LLCs
A member-managed LLC is managed by the members of the LLC. A manager-managed LLC is managed by professional managers hired by the members. In some case, the professional managers will also be members of the LLC. The differences between these two management organizations go further than who is in control; it also includes differences in compensation methods and taxes.
As stated above, members in a partnership-taxed LLC do not receive a salary in exchange for their services. The is not true in a corporation-taxed LLC.
In a manager-managed LLC, the managers will receive compensation for their actions. If taxed as a partnership, this compensation will be in the form of a special allocation or draw on profits. The special allocation will be greater than the compensation they would receive as a non-managing member to account for their additional work and effort. The same can be true in a member-managed LLC if any member(s) contribute(s) more effort than other members.