If you don’t pay yourself from your LLC, there are no immediate legal consequences-but it can create financial, tax, and business planning challenges over time.
Many LLC owners, especially in the early stages, choose not to pay themselves right away. Whether you’re reinvesting profits or not generating much revenue yet, it’s common to delay owner compensation. But while skipping payments won’t get you into trouble by itself, it’s important to understand the implications and know when to change course.
Contents
- 1. There’s No Legal Requirement to Pay Yourself
- 2. You Still Owe Taxes on Profits
- 3. For S Corporations, It Can Be a Problem
- 4. Skipping Pay Too Long Can Affect Business Viability
- 5. No Pay Can Affect Personal Finances
- 6. No Compensation = No Retirement or Benefit Contributions
- 7. When to Start Paying Yourself
- Final Thoughts
1. There’s No Legal Requirement to Pay Yourself
If your LLC is taxed as a sole proprietorship or partnership, there’s no federal law that requires you to pay yourself. You are allowed to leave profits in the business for as long as you want, and the IRS doesn’t require you to withdraw any specific amount or follow a set schedule.
Important: Even if you don’t withdraw funds, you’ll still be taxed on your share of the LLC’s profit.
2. You Still Owe Taxes on Profits
Whether or not you take money out of your LLC, the IRS considers the business’s net income to be your income-if you’re a single-member LLC or a partner in a multi-member LLC.
Example: If your LLC earns $50,000 in profit and you leave it all in the business account, you still owe income tax (and self-employment tax) on the entire $50,000.
This often surprises new business owners who think taxes only apply to money they actually pay themselves. That’s not how LLC taxation works. You’re taxed on profits, not withdrawals.
3. For S Corporations, It Can Be a Problem
If your LLC is taxed as an S Corporation and you actively work in the business, the IRS requires that you pay yourself a reasonable salary through payroll. If you don’t, your business is out of compliance, and you could face penalties or reclassification of distributions as wages (with back taxes and interest).
Key Point: S Corps must run payroll for working owners. Skipping salary entirely can trigger audits or IRS enforcement.
4. Skipping Pay Too Long Can Affect Business Viability
Even if you’re allowed to delay compensation, not paying yourself long-term may signal a deeper issue. Ask yourself:
- Is the business generating enough revenue?
- Are you reinvesting wisely, or just scraping by?
- Is the business model sustainable if you can’t earn a living from it?
While short-term sacrifices are common, a long-term inability to pay yourself may indicate it’s time to reassess your pricing, margins, marketing strategy, or expenses.
5. No Pay Can Affect Personal Finances
Even if your business is growing, skipping pay can create problems in your personal life:
- Difficulty budgeting: Without regular income, personal financial planning becomes harder
- Loan approvals: Lenders often want proof of consistent income
- Retirement savings: No pay may mean no contributions to retirement accounts
Establishing a modest, regular payout-even just to cover personal basics-helps keep your household finances steady and avoids unnecessary stress.
6. No Compensation = No Retirement or Benefit Contributions
In many retirement or benefits programs-especially SEP IRAs or Solo 401(k)s-your ability to contribute is tied to how much you pay yourself. If you take no draw or salary, you may not be able to make contributions.
Also, if your LLC contributes to your health insurance, that must be documented and paid out as part of your compensation if you’re an S Corp owner. No salary = no benefit deductions.
7. When to Start Paying Yourself
You don’t need to pay yourself immediately, but you should set a clear goal for when you’ll start:
- Once the business covers all monthly expenses
- Once there’s consistent profit over 2–3 months
- After building a business emergency fund (e.g., 3 months of expenses)
Even a small monthly draw can create a psychological shift from hobbyist to serious entrepreneur. It also forces you to think about your business as something that must support your life-not just itself.
Final Thoughts
You’re not legally required to pay yourself from your LLC, but failing to do so long-term may cause financial, tax, and strategic challenges. Even small, regular draws or salary payments can help stabilize your finances, make your business more sustainable, and keep you aligned with IRS expectations. If your business can’t support you yet, work toward that goal-and make sure you’re not putting off compensation without a plan.
