Owner Draw 101
Have you heard the term Owner Draw, but you’re not really sure what it covers? Are you sure you understand all the types of transactions that can be considered an Owner Draw? Today I’m going to go through Owner Draws and lay it all out for you. So let’s go.
What is an Owner Draw?
Let’s define what an Owner Draw is. This is any time you take money out of your business to finance or cover or pay for a personal item. This pertains to Sole Proprietors, DBAs, LLCs, and even S Corporations. However, if you’re an S Corporation, these are called Owner Distributions, but they’re exactly the same thing. There are several different transactions that can occur that would constitute an owner draw. Let’s talk about the most basic, paying yourself.
Paying Yourself and Owner Draws
Most of you pay yourself and you should. Let’s say you take a weekly draw of $500 or a monthly draw of $1,000 from your business. This is an owner draw. This is you, paying yourself and that’s exactly what this is meant to be. I would like to note that if you’re an S corporation, though, it’s important, you understand that in order to be an S corporation and be IRS compliant, you must be on payroll through your company and your Owner Distribution. S Corporations have to be less than your total equity in the company. I know it’s a lot of accounting jargon. Luckily for you, you can head to my Business Structure Bootcamp, where I dive into all of this and help you sort all this out so you have a full understanding.
Do Personal Meals Count as an Owner Draw?
That money you pay yourself is definitely an owner draw. Let’s say that you’re out and about, and you either on accident or on purpose, use your business debit card or credit card to purchase a meal that doesn’t qualify as a business deduction. You can learn all about Meal Deductions here. So this meal, because it’s not a business expense, doesn’t qualify as an Owner Draw because you are purchasing a personal meal with business funds.
Estimated Taxes and Owner Draws
One of the most confusing one for people is Estimated Tax Payments or paying taxes due after you file them. Unfortunately, unless you’re a C Corporation, there is no actual business tax. You can learn all about Business Taxes here. All taxes for LLCs, Sole Proprietor, DBA and S Corporations flow through to your personal return. So these are personal taxes and should be paid with personal funds. But a lot of my clients will pay them with their business bank account, which makes these transactions Owner Draws. This is because you are paying personal taxes or personal Estimated Tax Payments with business funds.
LLCs and Owner Draws
If you are an LLC, that means you have limited liability. You really want to be clear and show the separation of your business and personal by making sure that what you pay yourself is Owner Draw in one lump sums. You need to make sure that you’re not using your business credit card or debit card to use all these tiny transactions through your business like it’s a personal account. If you do that, you start to create doubt within that limited liability. You need to be treating your business as a separate entity from your personal. I go through all of that stuff inside of my Business Structure Bootcamp.
Were there any of these areas that surprised you? I’d love to hear. Now you have a place to get started to finally get control of your bookkeeping once and for all. You can grab more support and resources for your creative business in my community, #CreateMore with Tiffany. Every Friday, you can grab my LIVE Coaching Call on topic just like this! If you are ready to get your financial sh!t together and makeover your creative business bookkeeping, book a call with me here!