Small business owners have a variety of withdrawal methods available to them when attempting to minimize the amount of vulnerable assets within the business. Payment of salary is the most common method, subject to certain tax issues.
Generally, the earnings of the limited liability company (LLC) will be subject to the self-employment tax, irrespective of whether or how these earnings are distributed.
Therefore, there is no self-employment tax advantage to distributing earnings as opposed to paying salary. In other words, there is no disadvantage, as far as self-employment taxes are concerned, to paying salary as opposed to distributing earnings. However, because the state LLC statutes usually impose the same constructive fraud test as the Uniform Fraudulent Transfers Act (UFTA), the paying of salary in the LLC also does not confer any advantage.
In contrast, the state corporation statutes impose more stringent balance sheet tests than what is imposed by the UFTA. Thus, in the case of the corporation, the payment of salary confers a benefit, because salary is not paid on account of an ownership interest, and thus helps you to avoid the state corporation statutes' more stringent balance sheet tests.
Nevertheless, similar to the corporation, an LLC's payment of salary, as opposed to distribution of earnings, does qualify the distribution under the state and federal asset exemption provisions. Thus, especially because there are no self-employment tax disadvantages, overall, payment of salary is the better alternative in the LLC.
Finally, an effort should be made to structure the LLC's payments of salary as "guaranteed payments."
In addition, payments for loans and leases are another advantageous way to withdraw funds from the business.