How to Write a Check to Yourself From Your Business

Writing a check from your business to your personal account is a common practice for business owners to access funds for personal needs. This transfer allows owners to manage their individual finances, whether for covering living expenses, making personal investments, or other purposes. Understanding the proper methods for these transfers is important for both financial clarity and tax compliance.

Types of Business Payments to Owners

The method a business owner uses to take money from their business depends significantly on the business’s legal structure, and each method carries distinct tax and accounting implications. For sole proprietorships, partnerships, and single-member Limited Liability Companies (LLCs) that are taxed as sole proprietorships, the typical way to withdraw funds is through an “owner’s draw.” An owner’s draw represents money taken from the business for personal use; it is not a tax-deductible business expense. Owner’s profits are subject to self-employment and income taxes at their individual rate, regardless of how much is drawn, as the IRS views the owner and business as a single entity for tax purposes.

In contrast, owners of S-corporations and C-corporations typically receive payments through salary/wages or distributions/dividends. S-corporation owners who work for the business must pay themselves a “reasonable salary,” a W-2 wage subject to federal income, Social Security, and Medicare taxes. This salary is a deductible business expense for the corporation, reducing its taxable income. Remaining profits can be taken as distributions, generally not subject to self-employment taxes, providing a tax advantage compared to sole proprietorships. The IRS mandates that an S-corporation owner’s salary be comparable to what a similar business would pay for similar services, considering factors like experience, duties, and time devoted to the business.

C-corporation owners, like S-corporation owners, can receive a salary, a deductible business expense. Additionally, C-corporations can distribute profits to shareholders as dividends. C-corporation dividends are subject to “double taxation”: the corporation pays tax on profits, and shareholders pay personal income tax on dividends. This double taxation often makes C-corporation owners prefer salary compensation where feasible.

Steps to Write the Check

Writing a check from your business account to yourself involves filling out each section accurately. Write the current date in the designated space, typically in the top right corner. Next, on the “Pay to the Order of” line, clearly write your full legal name, ensuring it matches your personal bank account details.

In the box to the right of the payee line, write the numerical amount (e.g., “$1,500.00”). Directly below this, on the line where the amount is spelled out, write the amount in words, followed by “and 00/100 Dollars” (e.g., “One Thousand Five Hundred and 00/100 Dollars”). Draw a line through any remaining blank space on this line to prevent alteration.

The memo line, in the bottom left corner, records the payment’s purpose. Specify the payment type, such as “Owner’s Draw,” “Payroll,” or “Shareholder Distribution,” aligning with your business structure’s payment method. Finally, sign the check on the signature line, using your business account’s authorized signature.

Recording Business Owner Payments

After writing the check, accurately recording the transaction in your business’s financial records is important for proper accounting and tax compliance. For an owner’s draw, common for sole proprietorships and single-member LLCs, the accounting entry involves debiting an “Owner’s Equity” or “Owner’s Draw” account and crediting the “Cash” account. This reflects a reduction in owner’s equity, as draws are not business expenses and do not appear on the income statement.

When an S-corporation or C-corporation owner receives a salary, the transaction records as a payroll expense. This involves debiting a “Payroll Expense” or “Officer’s Salary” account and crediting the “Cash” account, along with accounting for payroll tax liabilities. Since salaries are deductible business expenses, they reduce the business’s taxable income. Proper payroll processing, including withholding and remitting federal income, Social Security, and Medicare taxes, is necessary.

For dividends or distributions, common in S-corporations and C-corporations, the accounting entry involves debiting “Retained Earnings” or a “Dividends Declared” account and crediting the “Cash” account. This reflects a distribution of accumulated profits to shareholders. Accurate record-keeping for all payment types is important for preparing financial statements, fulfilling tax obligations, and demonstrating the legitimate flow of funds.