Owner's Draw
Money taken out of the business by the owner for personal use.
Definition
An owner's draw (or owner's withdrawal) is when a sole proprietor, partner, or LLC member takes money from the business for personal use. Unlike wages, draws aren't expenses—they reduce equity (the owner's capital account).
Draws are common in businesses taxed as pass-through entities (sole proprietorships, partnerships, LLCs). The owner pays income tax on all business profit, not just draws, so draws don't affect tax liability—they're simply accessing after-tax profits.
Why It Matters
Understanding draws vs. wages is critical for proper accounting and tax compliance. S-corp owners must take reasonable wages (subject to payroll tax) before draws. LLC members can take draws anytime but should track them separately from business expenses.
Excessive draws can strain business cash flow. While you legally can draw unlimited amounts from your own business, doing so without considering cash needs for operations and growth is financially risky.
Examples
- 1
LLC owner takes $5,000 draw: Debit Owner's Draw $5,000, Credit Cash $5,000. At year-end, close draw to owner's equity.
- 2
Partnership: each partner takes monthly draws of $10,000, accounting for their share of profits.
- 3
S-corp owner takes $60,000 salary (W-2) plus $40,000 distributions (owner's draw equivalent) for total $100,000 compensation.
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