How to take a draw in a multi-member LLC?

My business partner and I are forming an LLC. As I understand, members of an LLC are not employees and therefore are not on payroll. Instead they pay themselves by taking a draw from the LLC funds.

If we are 50-50 owners can we each only draw up to 50% of the LLC funds? The reason I ask, is that my business partner has a full-time job, and won't be using the LLC funds to pay for his living, while I will be using the funds to pay for my living.

Come tax time, will we each get taxed on 50% of the remaining funds in the LLC account at the end of the year?

In answer to your question, NO -- you do not get taxed on the funds remaining in the LLC. That's not how it works.

Recall that LLCs have what's called "pass-through" taxation unless you've elected to be taxed as a corporation. So, think of it like you would if you were a sole-proprietor: You put, say $50,000 into the company, it spends $20,000 in expenses and makes $120,000 in revenue. At the end of the day, the company has $50k - $20k + $120k = $150,000. The increase of $100,000 is taxable to you.

Now, let's say you owned the same company equally with somebody else, a 50/50 split, where you each originally put in $25,000. Under the most common setup for LLCs, half of the increase is allocated to you, and half is allocated to him. You each owe tax on $50,000.

Now, let's say that you're really the only person working the company. So, you need to be paid something--say $40k--for the services you provide to the company. You set this up as a "guaranteed payment", which is taxable to you, but gets deducted from what the company has. So, instead of having $150k, it only has $110k. Now, the $60k increase ($110k - $50k = $60k) is taxable to the two of you equally. So, you're taxed on $70k (the $40k + 1/2 the $60k), and your partner is only taxed on the other $30k.

Change it again -- say that both of you are working the business, but that you need more cash than your partner does. (Maybe you have a family and he's single). So, at the end of the year, you take out $40k. You can do that because you originally put in $25k and half the profit ($50k) is allocated to you. for a total of $75k. So you take a distribution from the company. As a result, the Company now has $110k. However, that money is not equally allocated between you and your partner -- $75k of that is considered to be his; the remaining $35k is considered to be yours.

[Note, however, that I said "under the most common setup" -- it's possible to set up the LLC with other schemes. But, to understand all the variations, you literally need a graduate course in partnership taxation, which is a complicated area of tax law.]

I'm not an accountant but am a member in a 60/40 LLC and when it comes to taxes it's 60 / 40. I think in your case you will both be responsible for 1/2 of the tax burden of the business.

However, I think the draw can be arbitrary...
So you could each draw out the necessary amount to pay for your taxes. Then you could draw more when you want to pay yourself. But he would still be paying the taxes on that.

Example situation.

Company makes $200,000. You have $100,000 in expenses.. you get taxed on $100,000. Let's say that is $30,000. You are each responsible for $15,000. So you could each pull $15,000 out of the business to pay those taxes. But you could pull out the remaining $60,000 of profit just for yourself and not pay him. I think - definitely an accountant question, but I think that is how it works.

@ Van Gale, not necessarily. You can take a draw whenever you want, for however much you want as long as his partner agrees. You could act as if it is a regular payment if you like, but I don't see much of a reason to do so since owners try to keep as much money in the business as possible and only draw on good profits or if they are personally cash-strapped.

If this isn't money you personally put in and are getting back out, then it's counted as income on your personal taxes.

The thing about LLC income is that you and your partner will share the tax burden for 50% of income of the business, no matter how much you each draw out.

(Disclaimer: not an accountant or attorney)

With an LLC you can make payments to yourself with what is called a "guaranteed payment" instead of draw. Guaranteed payments will be expenses to the LLC (just like normal wages) and have their own line item on the K-1.

Any profit made by the LLC will then be split based on your percentage ownership, so the other member won't have to pay taxes on payments made to yourself.

You will probably want to put some paragraphs into your LLC Operating Agreement about how these guaranteed payments are calculated and paid.