A member’s draw, similarly called an owner’s draw or partner’s draw, records the amount taken out of a company by one of its owners. QuickBooks records the draw in an equity account that also shows the amount of the owner’s investment and the balance of the owner’s equity. The draw is a way for an owner to receive money from the company without drawing a salary. But it shouldn’t be used for every type of business organization.
Members of an LLC
Owners of limited liability companies are legally called members. Since an LLC has options to be taxed as a sole proprietorship, partnership, S corporation or C corporation, LLC members set up their QuickBooks accounts to correspond to the business structure under which they elect to be taxed by the Internal Revenue Service. The member’s draw comes into play primarily when an LLC follows the structure of a sole proprietorship or partnership.
A company’s equity is figured from the money invested in the company and the company’s profit and losses. Equity accounts in QuickBooks can record owner’s equity, owner’s draws, capital investment and capital stock. If the company is a sole proprietorship or single-member LLC, QuickBooks recommends at least one equity account to track the owner’s personal investments and draws. For a partnership, an equity account is set up for each partner. If an owner puts up $15,000 of his own money to start up a business and then draws $10,000, he reduces his equity in the company to $5,000. However, if his company shows a $20,000 profit for the year, QuickBooks shows that profit at the start of the next tax year as “retained earnings” and adds it to the company’s equity. In the case of a company taxed as a sole proprietorship, the owner’s equity is $25,000.
Sole Proprietorships and Partnerships
For companies treated as sole proprietorships, the entire profit is taxed as personal income of the owners. For partnerships, the entire profit is divided among the partners to report to the IRS, regardless of whether the entire profit is distributed. Owners and partners actively involved in running the company must also pay self-employment tax. In neither case are the owners paid a wage separate from their profit share. Their share of retained earnings are added to their equity. For an owner to pay herself, she simply writes herself a check and records it as an owner’s draw that reduces her equity balance.
S and C Corporations
For S and C corporations, and LLCs taxed as such, owners actively involved in the management of the company must be paid a salary under federal tax regulations. The wages do not reduce their equity. Any share of profit apart from wages attributed to them in an S corporation, or distributed in a C corporation, is not subject to employment tax. In those cases, instead of an owner’s draw, each owner’s equity account would instead show “shareholder’s distribution” for money received from the company’s profits.