Can I Write a Check to Myself From My Business Account?

Writing a check from a business account to a personal account is a common practice for business owners. The proper procedure depends on the business’s legal structure and the purpose of the transfer. Understanding these distinctions is important for maintaining financial integrity and complying with tax regulations. Improperly transferring funds can lead to significant financial and legal consequences, including issues with asset protection and tax audits.

Owner’s Draws for Unincorporated Businesses

Owners of sole proprietorships and single-member Limited Liability Companies (LLCs) that are taxed as disregarded entities use what is called an “owner’s draw” to take money from their business for personal use. This method allows business profits or capital to be withdrawn by the owner. For multi-member LLCs taxed as partnerships, similar distributions are made to partners. An owner’s draw is not considered a business expense and is not tax-deductible for the business. Instead, it reduces the owner’s equity in the business.

The process of taking an owner’s draw is straightforward, often involving writing a check from the business account to a personal account or making an electronic transfer. From an accounting perspective, when an owner’s draw is made, the “Owner’s Drawing” or “Owner’s Withdrawals” account is debited, and the “Cash” account is credited. This “Owner’s Drawing” account is a temporary contra-equity account, which is typically closed at the end of the fiscal year by transferring its balance to the owner’s capital or equity account, thereby reducing the owner’s overall investment in the business.

Owner’s draws are not taxed at the moment of withdrawal. Instead, the owner’s share of the business’s net profits is taxed personally, regardless of whether those profits were actually withdrawn. This means that even if an owner leaves profits in the business, they are still responsible for paying income tax on that business income. Self-employment taxes, which cover Social Security and Medicare contributions, apply to the net earnings from self-employment, and owner’s draws do not reduce this taxable amount. Owners pay estimated taxes quarterly to cover these personal income and self-employment tax liabilities.

Formal Compensation and Distributions for Incorporated Businesses

Incorporated businesses, such as S-Corporations and C-Corporations, have more formal procedures for owners to receive money. The IRS views owners of corporations who work for the business as employees, necessitating a structured approach to compensation.

For S-Corporations, owners who actively work in the business must pay themselves a “reasonable salary” as W-2 wages. This salary is subject to all applicable payroll taxes, including Social Security and Medicare. The IRS defines reasonable salary as the amount that would typically be paid for similar services by similar businesses under similar circumstances. After paying a reasonable salary, any remaining profits can be distributed to owners as non-wage distributions, often referred to as dividends. These distributions are generally not subject to self-employment taxes but are taxable to the owner as ordinary income or capital gains.

C-Corporation owners are also considered employees of their business and receive compensation through a salary (W-2 wages) subject to payroll taxes. C-Corporations can also pay dividends to shareholders from their profits. A key distinction for C-Corporations is the concept of “double taxation,” where the corporation pays income tax on its profits, and then shareholders pay personal income tax on the dividends they receive from those already-taxed profits. Unlike salaries, dividends are not tax-deductible for the corporation. Owners can also be reimbursed for legitimate business expenses they paid personally, and these reimbursements are generally not considered taxable income to the owner.

Maintaining formal procedures, such as proper payroll processing for salaries and clear documentation for distributions, is important for incorporated businesses. Adhering to these formalities helps maintain the legal distinction between the business entity and the owner. This separation, often referred to as the “corporate veil,” protects the owner’s personal assets from business liabilities.

Key Financial Considerations

Regardless of the business structure, maintaining separate business and personal bank accounts is a fundamental practice. This separation simplifies financial record-keeping, enhances tax compliance, and provides legal protection for personal assets by making it clear what belongs to the business versus the owner. It allows for accurate tracking of business income and expenses, which is helpful during tax preparation and in the event of an audit.

Meticulous record-keeping for every financial transfer is also important. This includes documenting the date, amount, purpose (e.g., owner’s draw, salary, reimbursement), and recipient of the funds. Utilizing accounting software or maintaining detailed ledgers can assist in this process, providing a clear audit trail and supporting financial statements.

Owners should also consider their business’s financial health and cash flow needs before making any withdrawals. Over-withdrawing can leave the business without sufficient funds to cover operational expenses, pay creditors, or invest in future growth. Ensuring the business can meet its obligations is important for its long-term stability.

Consulting with a tax professional is also highly recommended to understand the specific tax implications of various withdrawal methods for a particular business structure. This professional guidance can help with effective tax planning throughout the year, including making appropriate estimated tax payments to avoid penalties. Finally, avoiding “commingling” of funds—mixing personal and business finances—is crucial. Commingling can jeopardize the legal protections afforded by certain business structures and complicate financial tracking, potentially leading to issues with tax authorities.