Most owners of small businesses pay themselves the simplest way: they move money from the business account to their personal account. How that money is recorded in the books matters more than most people expect.
The short answer: an owner’s draw is money the owner takes out of the business for personal use. It is not a business expense and not wages. It is recorded in an equity account, such as Owner’s Draw, so the profit and loss stays accurate. Whether you should take draws or a salary depends on how the business is set up, which is a question for your CPA.
What counts as an owner’s draw?
An owner’s draw is money the owner takes out of the business for personal use. That includes:
- Transfers from the business account to your personal account.
- Checks written to yourself.
- Personal purchases paid with a business card or account.
It comes out of the owner’s share of the business, which the books track in equity.
Is an owner’s draw an expense?
No. A draw doesn’t cost the business anything to earn its income, so it doesn’t belong on the profit and loss. Recorded as an expense, it makes the business look less profitable than it is. It belongs in equity, where it reduces the owner’s share of the business.
Owner’s draw vs salary vs distribution
How an owner is paid depends on how the business is set up and taxed:
- Sole proprietors, and members of many LLCs and partnerships, usually take draws.
- Owners of a corporation who work in the business, including an S corporation, are generally paid a salary through payroll, and may also receive distributions.
A distribution is similar to a draw in the books: money paid out to an owner from the business, recorded in equity. Which applies to you, and in what mix, is a question for your CPA, and it is worth asking before the year starts, not after it ends.
Owner’s draw vs owner’s equity
Owner’s equity is the owner’s total share of the business: what you put in, plus profits kept over the years, minus what you took out. A draw is one piece of it. Each draw lowers equity by the amount taken. Our balance sheet guide shows where these lines sit.
Try it
Draw, expense, or money put in? Sort each one.
1 of 6
Moving money from the business account to your personal account
1 of 6
Moving money from the business account to your personal account
Money you take out for yourself is a draw, recorded in equity.
2 of 6
Paying the shop’s electric bill
2 of 6
Paying the shop’s electric bill
A cost of running the business: it belongs on the profit and loss.
3 of 6
Groceries paid with the business card
3 of 6
Groceries paid with the business card
Personal spending paid by the business is a draw, not an expense.
4 of 6
Putting your own savings into the business account
4 of 6
Putting your own savings into the business account
Recorded in equity, as Owner’s Investment. It isn’t income.
5 of 6
Buying parts for a customer’s job
5 of 6
Buying parts for a customer’s job
A cost of doing the work: it belongs on the profit and loss.
6 of 6
A check written to yourself
6 of 6
A check written to yourself
However it’s paid, money you take for yourself is a draw.
0 of 6 sorted
How to record it in QuickBooks Online
- Use an equity account for draws, such as Owner’s Draw, and record each transfer to your personal account there.
- When you put your own money into the business, record it in a separate equity account, such as Owner’s Investment, not as income.
- If a personal purchase lands on the business card, record it as a draw, and try to keep personal spending off business accounts.
Why it matters
- Recorded as an expense, a draw makes the business look less profitable than it is, and the profit and loss stops telling the truth.
- Recorded as income, money you put in makes it look more profitable than it is.
- Mixed in with business spending, personal costs make it hard for your CPA to see what is deductible, and hard for a lender to read your books.
At year-end
Your CPA will want to know how much you took out and how much you put in during the year. With draws and investments recorded in their own equity accounts, those totals are one report away. Our year-end checklist includes this step.
Frequently asked questions
It depends on how your business is set up and taxed. Sole proprietors and many LLC members take draws; corporation owners who work in the business are generally paid through payroll. Ask your CPA which fits you.
For many owners, taxes are figured on the business’s profit rather than on the draws themselves. How that works for you depends on how the business is set up, so ask your CPA.
No. It is recorded in equity. Recording it as an expense understates the business’s profit.
The books can show what the business has earned and what cash it has. How much to take, and the tax effect, is a conversation with your CPA.
Yes. The entries can be moved to the right account, usually for the whole year, so the profit and loss is right before it goes to your CPA.
Start with a conversation
Keeping business and personal money apart is one of the first things we look at in a new client’s books. If yours need a second look, request a free consultation. Prefer to call? 781-924-1489.