Payments for Salary

A small business owner has a number of withdrawal methods available when seeking to minimize the amount of vulnerable assets within an entity by withdrawing funds from the business. One way is to take a salary from the business as compensation for services rendered. But there are some statutory restrictions on how this must be done.

Salary payments are the most common form of withdrawal for small business owners. IRS rules limit payments to reasonable compensation, and the courts have consistently allowed rather high salaries to the owners of small businesses.

In addition, constructive fraud provisions do not limit the payment of salaries because this income is by definition in exchange for return value (i.e., time spent working for the business). However, the Uniform Fraudulent Transfers Act's actual fraud provisions, and the financial tests associated with them, still apply to these types of withdrawals from the business.

The important thing to remember about salary payments, when it comes to these fraud provisions, is to make these withdrawals regular and in writing. Good recordkeeping will go a long way toward proving the validity of these withdrawals.

Generally, for salary payments, there is an important tax situation to consider. All the earnings of a limited liability company (LLC) are subject to the self-employment tax, as opposed to a corporation where the tax is imposed only on salary paid to the owners. This difference can affect how you structure the withdrawals from your business based on the form you do business in.

• salary tax issues for the corporation
• salary tax issues for the LLC