One of the questions asked most often by new business owners
is "How do I pay myself from my business?"
After all, among the reasons for starting your own business
is to earn income for yourself, so knowing how to get that income out of the
business is critical. As a business owner, you are faced with a number of new
challenges as you launch and grow your business. This article will help provide
guidance for one of the most universal challenges.
The first item to cover is the type of entity. How has the
business been formed? As a Partnership? As a Sub-S Corporation? Or perhaps you
have not formed an entity and are doing business as a sole proprietor (whether
or not you have registered a DBA name).
We need to start with the form of entity because the answer
to the original question varies based on what type of entity you have created.
We will follow up with a more detailed discussion of entities, but for now,
here is how we answer the question of "How do I pay myself from my
business?"
Owners of most types of businesses (other than 'C'
corporations) have the ability to write themselves a check from the business,
though some entities are more restrictive than others. However, the coding and
characterization of the payment must be properly identified.
A sole proprietor can write a check to take funds out of the
business at any time. Checks written to the owner should be posted to Owner's
Draw or Distributions. Those are simply two different labels that describe money
taken from a business by the owner. To pay yourself, print or write a check and
post the check to the Distribution account.
Similar to a sole proprietor, partners can write checks to
take funds out of the business at any time. However, if you are taking money
out of a partnership that is not making profit, be sure to check with your tax
professional about whether you have received excess distributions.
Sub-S corporations are companies that elect to pass
corporate income, losses, deductions, and credits through to their shareholders
for federal tax purposes.
When corporate officers perform services for the Sub-S
corporation, and receive payments for those services, their compensation is
generally considered wages. The fact that an officer is also a shareholder does
not change this requirement. Once they have been paid an amount equivalent to a
reasonable salary, they can then take distributions from profits.
A regular or 'C' corporation reports and pays federal and
state income tax on its net income. There is no flow-through to the
shareholder's personal tax returns. Therefore, shareholders are not entitled to
take funds out of the corporation. Checks written to shareholder-employees must
be in the form of salary and are subject to all appropriate payroll taxes.
The purpose of this article was to provide some general
information and guidance about this topic. However, there are many tax
considerations to any response for the question of how you can pay yourself
from your business. Further, do you know how to actually complete the
transactions necessary to take money out of your business?
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