An owner’s distribution or draw is a withdrawal of funds from a business by its owner for personal use, which reduces the owner’s equity in the company and may be subject to taxes.

Primary Implication

Owners’ Compensation is a P&L expense item that reduces Net Income whereas an Owners’ Distribution is an asset transfer that reduces current assets and owners’ equity.  Neither happens on a life changing bases unless the business excells at converting sales into profits that build cash reserves.

Overview

An Owners’ Distribution or draw is money the owner takes from cash reserves for their personal use. The amount of an owner’s draw is not reported as an expense on the P&L Statement of the business. Instead, the owners’ draw is a direct reduction of the owners’ capital, reducing the amount of total equity.

When a business owner withdraws profits generated by the business, this is viewed as taxable income on the owner’s personal tax return. If the owner is taking out funds previously contributed to operate the company, then it must be made clear in your financial statements that the owners’ draw is from capital contributed, not profits generated.

When reviewing this line item, the core question is, are you satisfied with how much money you are taking out of your business?  If not, what will you do differently today to create more income from the business that builds cash reserves that you can take a distribution from as an owner of the cash left over after paying all expenses?