What is an Owner's Draw? How Does a Draw Work?
Taking a Draw from Your Business
What is Owner's Draw?
Owner's draw, usually called simply "draw," is the amount taken out by the owner of a sole proprietorship or partnership for his or her personal use. It's called draw, because money is drawn out from the business. (In the past, this payment might have been called a bank draft.) The three types of business owners who take out draws are:
What Business Owners Take a Draw?
Owners of small businesses don't take a salary, because they aren't employees.
The types of business owners who take a draw are sole proprietors, partners in partnerships, and owners (called members) of limited liability companies.
A self-employed business owner does not usually take a salary. Instead, he or she makes an initial investment (capital contribution) in the business from personal funds and during the course of the business takes money out as draw and invests more money, from profits or from personal savings.
Business owners take a draw by writing a check from their business bank account. For accounting purposes, the draw is taken as a negative from their business ownership account, called owner's equity.
What Types of Business Owners Take a Draw?
In some cases, self-employed business owners may have an option to take a draw or a salary, depending on the tax circumstances.
If you are self-employed, check with your tax professional before taking a salary from your business.
Why Don't Corporate Owners Take a Draw?
Owners of corporations are shareholders, and they take money out of the corporation as dividends. If an owner of a corporation works for the company, he or she is considered an employee, and is paid a salary for the work done.
How Does Draw Affect a Business Owner?
Owner's draw decreases the owner's capital account. This is the account on the business balance sheet that shows the amount the owner has invested in the business, minus amounts taken out in draw, at any point in time.
To take out a draw from a business, typically a check is written from the business checking account to the owner and it is deposited in the owner's personal account.
Be sure to keep business and personal spending separate. The owner's draw should be the only place where personal and business intersect.
Taking a draw does not affect the owner's taxes, because it is not taxable income. One disadvantage to taking a draw: Because draw isn't reflected in your business tax return, you don't doesn't have an income to show for personal loans or home mortgage purposes.
How Much Draw Can a Business Owner Take?
The owner can take as much draw as he or she wants, at any time. Of course, there must be money in the business checking account that's available to be withdrawn. Some business owners take a monthly draw, like a salary. During the startup of a business, it's common for the owner not to take a draw until the business has a positive cash flow.
Just because your business is profitable on paper doesn't mean you have enough cash in the bank.
Before you take that draw, consider both short-term and long-term needs for the money coming into your business. If you take a draw one month, and you don't have enough cash to pay a tax bill or make your lease payment the next, you can get into financial trouble quickly.
At business startup, you may not be able to take a draw at all, because all of your available cash will be needed to pay off bills until your business income exceeds your expenses. Setting out a strict budget and not spending money until you have it is always a good idea.
Susan Heathfield from TheBalance has some guidelines for when you can take a draw from your business and how much to take.
How Does Draw Affect Business Profits?
How much a business owner takes out of the business as a draw has no affect on the profit of the business.
Owner draw is not an expense of the business and amounts drawn are not tax deductible to the business. Owner draw is also not taxable to the business owner.