Here at CenterState Bookkeeping, I have had several people ask for an explanation of the following terms, and thought it may be useful to have them written out for you.
Owners Draw– direct payment to a sole proprietor from the business.
Shareholder Distribution– an individual owner’s share of income, gain, loss, deduction, or credit
Now, you may be wondering what is the difference between these two. The answer is:
- A sole proprietor or single-member LLC owner can draw money out of the business; this is called a draw. It is an accounting transaction, and it doesn’t show up on the owner’s tax return.
- A partner’s distribution or distributive share, on the other hand, must be recorded (using Schedule K-1, as noted above) and it shows up on the owner’s tax return.
- In the same way as a partner, a member of a multiple-owner LLC and an S corporation shareholder take a distributive share, with the amount recorded on
Knowing these differences is significant for tax purposes.
Another common question I get is, how do you pay yourself from your business?
You first want to always make sure that you have a reasonable compensation that you will be paying yourself. Depending on where you live in the world, ‘reasonable compensation’ or a similar term may apply to you. This is known as the amount of money that the government expects you to take from your business. It depends on the size of the business, the market sector and level of turnover and profit.
Here are some pointers for what’s a ‘reasonable’ amount:
- How much would a similar business pay for the work you do in your role?
- What do recruitment ads and agencies offer to pay for someone in your position?
- Are your wages equal to your duties and are those duties being performed?
- Do your wages seem reasonable when you take into account of your level of responsibility and the amount of business you handle?
- Is your pay directly related to the amount of time you spend working?
- Does your pay seem reasonable when compared with your employees’ wages?
Don’t just dip into your business funds as and when you need to. Set up payments for you and your employees (it may be weekly or monthly) in your payroll software, and stick to them.
Whenever you start your business implement payroll from the beginning, if you haven’t done this start now. That way you’ll get used to the amount of money you receive and won’t have to worry about taking out occasional large lump sums. This will also look better to your employees. Regular small payments will be more acceptable to them than random large lump-sum withdrawals from the business. They will also look more acceptable to the government, too. If you take out big sums of money at irregular times, it may raise questions at the tax office or lead to an audit of your company.
Payroll services offer workers compensation, health benefits, retirement benefits, tax recordings, HR services, and more depending on what is right for your business needs. Often times I find that my clients think that payroll services are going to be expensive, which is often times not the case.
I work closely with Brittany Noland-Harp, and she takes the time to sit down with her clients come up with the best options for them and then go over price in detail. If you would like to contact her please reach out to her at (828) 550-2381.
