What is an owner's draw?
In unincorporated businesses, such as sole proprietorships and partnerships, owners don't usually pay themselves a salary through payroll. Instead they take draws (also called drawings) from business profits.
How it's recorded
- Debit owner's drawings (an equity account), credit bank.
- At year-end, drawings are closed against owner's capital.
Draws reduce [equity](/glossary/equity). They don't appear in the [income statement](/glossary/income-statement) and don't reduce taxable profit.
Tax treatment
In most countries, a sole proprietor is taxed on the business's [net income](/glossary/net-income), whether or not the profit is drawn out. Taking more or less as draws doesn't change the tax bill directly.
Owner's draw vs salary
- Sole proprietors and partners: typically take draws.
- Company directors and shareholders: usually take a salary through payroll and/or [dividends](/glossary/dividend). Taking money from a company without a proper basis may be treated as a director's loan.
Example
A sole trader's business earns $60,000 profit. The owner draws $3,000 a month ($36,000 a year). Owner's equity increases by profit and falls by draws, a net increase of $24,000. Tax is based on the $60,000.
Tips
- Keep business and personal accounts separate.
- Record every draw clearly.
- Leave enough cash for tax, which is due on profit, not on draws.