How to Do an Owner’s Draw for Your Business

An owner’s draw is a common method for business owners to take money from their company for personal expenses, such as living costs or investments. This practice is particularly relevant for business structures that do not pay owners a traditional salary. Understanding how to properly account for an owner’s draw is important for maintaining clear financial records and ensuring compliance.

Understanding Owner’s Draws

An owner’s draw represents funds a business owner withdraws from their company for personal use. This method is typically utilized by sole proprietorships, partnerships, and Limited Liability Companies (LLCs) that are taxed as sole proprietorships or partnerships. The funds taken via an owner’s draw reduce the owner’s capital or equity in the business.

It is important to distinguish an owner’s draw from a salary or wage. A draw is not considered a business expense; it does not appear on the company’s profit and loss statement and does not involve payroll taxes or withholdings. Conversely, a salary is a fixed payment subject to payroll taxes and is treated as a business expense. Owners typically take draws to fund personal living expenses, investments, or other individual financial requirements.

Recording an Owner’s Draw

Recording an owner’s draw accurately is essential for maintaining proper financial records and separating business and personal finances. Funds can be withdrawn by writing a check from the business bank account to the owner’s personal account or initiating an electronic transfer. This separation helps prevent commingling of funds.

For manual accounting, the entry for an owner’s draw involves a debit to an Owner’s Equity or Drawings account and a credit to the Cash or Bank account. For instance, if an owner takes a $1,000 draw, the business’s cash account decreases by $1,000, and the owner’s equity account also decreases by $1,000. This reflects the reduction in the owner’s stake in the business.

Using accounting software simplifies the recording process. Users create an “Owner’s Draw” account under the equity section. When a draw occurs, it is recorded as a transfer from the business bank account to the owner’s personal account, categorizing the transaction against the Owner’s Draw equity account. It is crucial to document each draw with the date, amount, and a clear description for accurate tracking throughout the fiscal year.

Financial and Tax Considerations

An owner’s draw impacts a business’s financial statements by reducing the owner’s equity on the balance sheet. This means the owner’s stake in the business decreases. While a draw decreases the business’s cash on hand, owners must ensure sufficient cash remains for ongoing operations and future needs.

An owner’s draw is not considered an expense for the business and does not appear on the profit and loss statement. Taking an owner’s draw does not reduce the business’s net profit or taxable income. The business’s profit is taxed regardless of whether it is taken out as a draw.

Owner’s draws are generally not considered taxable income at the time of withdrawal for sole proprietorships, partnerships, and most LLCs, because these are pass-through entities. This means the business’s profits are “passed through” to the owner’s personal tax return, where they are taxed. The owner is taxed on the business’s net earnings, not the draw itself. The owner’s share of the business’s profits is subject to self-employment taxes, which cover Social Security and Medicare contributions. Consulting with a qualified tax professional or accountant is advisable for personalized guidance.