Small Business

Taking a Draw: How Much Is Enough?


By Karen E. Klein Q: I would greatly appreciate getting an explanation on what is an "owner's capital draw." Can this draw be for any amount? Do I have to pay it back? -- C.S., Skokie, Ill.

A: The "owner's capital draw" is the name of the account normally used in a general ledger to record the amounts paid to the owner of a sole proprietorship from the company's accumulated profits and/or capital.

"The draw amount is at the discretion of the owner, up to the total amount of capital in the business," says Tom Bargsley, a CPA based in Austin, Texas. "The owner's draws are not deductible for tax purposes, since they are a withdrawal of capital [including profits]."

Since draws are not loans, there is no repayment required, and because draw amounts are not taxable, they can be made at any time. Of course, if your company has investors, partners, or shareholders, you probably won't have carte blanche when it comes to how much capital you can extract from the business. But generally, the boss gets to control the capital and benefit from the profits of the company. Hope that helps! Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus