What Does it Mean to "Take a Draw & Not a Salary"?
Sole proprietors anticipate the control, the pride and the profits when planning out their business. They make the decisions and control the actions of the company. The business fails or succeeds based on the work of the owner, creating a source of pride for him. The profits belong to him. Sole proprietors who work in the daily operation of their business either earn a salary or draw money from the business.
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Salary
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A salary represents compensation paid for working in the business. The business compensates each employee based on an hourly rate per hours worked or based on a weekly rate. The business deducts certain amounts from the employee's gross pay, such as income tax, health insurance or retirement contributions. The gross pay minus the deductions equals the net amount paid to the employee. Sole proprietors who collect a salary serve as employees in the business and receive compensation based on the pay rate with all deductions withheld.
Owner's Drawing
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Drawing money from the business refers to cash taken out of the business funds as a return of profit. The owner receives draws when she chooses to use the funds for personal use. The business issues a check to the owner, but withholds no deductions. Funds drawn from the business reduce the equity maintained in the business.
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Similarities
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Both owner's drawing and a salary paid to the owner provide the owner with cash to use for his own personal use. The company's cash balance decreases by the amount of money paid. The owner's equity balance decreases in both situations. If the company pays a salary to the owner, the company reports an expense and net income decreases. The lower the net income reported, the lower the owner's equity equals. If the company pays the owner a draw, the company reports a decrease in owner's equity.
Differences
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Owner's drawing and salaries vary in a couple ways. When the company pays a salary to the owner, it also needs to submit payments for each deduction. Income taxes need to be paid to the Internal Revenue Service. Insurance premiums need to be paid to the provider. Retirement contributions need to be paid to the plan administrator. The business also reports drawings and salaries on different financial statements. The company reports salaries on the income statement as an expense. The company reports owner's drawing on the statement of owner's equity.
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