A single-member LLC is taxed the same way as a sole proprietor, and both are treated as disregarded entities. Meaning, the founder reports business income on Form 1040 Schedule C. Owners cannot be on payroll and must take equity draws instead of wages. Taxes are paid through estimated payments and self-employment tax. 

 Multi-member LLCs taxed as partnerships allow partners to take guaranteed payments for services and equity draws from profits. All income is reported on Form 1065 and passed through on Schedule K-1. Partnership owners are subject to self-employment tax on their share. 

LLCs electing S corporation status must pay founders “reasonable compensation” through payroll. This means the owner is treated as an employee and issues themselves a W-2. After meeting payroll requirements, additional equity draws may be taken without self-employment tax.

LLCs taxed as C corporations pay founders through payroll wages and may also issue dividends. Dividends are not deductible to the company, creating potential double taxation. Founders and shareholders of C corps often balance W-2 salary with dividends for tax efficiency.

Nonprofit or 501(c)(3) entities may pay founders a salary as employees but cannot distribute profits as dividends or equity draws. Compensation must meet IRS “reasonable” standards to avoid penalties with wages and compensation reported on IRS Form 990. Any surplus revenue is reinvested into the organization’s mission.