Money moves from your business account to your personal account. Your bank calls it a transfer. Your bookkeeping software calls it a transfer. Your CPA, in March, needs it to be one of three specific things, and which one depends on how the business is taxed, not on what you meant. Get it wrong and you have either paid payroll tax you did not owe, skipped payroll tax you did owe, or taken out money the IRS will treat as a capital gain.
This guide explains the three ways an owner takes money out of a business (draw, salary, distribution), which ones apply to a sole proprietorship, a single-member LLC, a partnership and an S-Corp, how each is booked, what each costs in tax, and how to handle the owner who has more than one of these at the same time.
An owner draw is money taken out of a business that is not a separate taxpayer from you: a sole proprietorship or a single-member LLC. It is not income to you (the business's profit already is), it is not an expense to the business, and it is not taxed on its own. It reduces your equity in the business.
A salary is compensation for work, paid through payroll, with withholding and payroll taxes. It is an expense to the business and wage income to you. It exists only where the business is a separate employer from you for tax purposes: an S-Corp or a C-Corp.
A distribution is a payment of profit to an owner by a partnership or an S-Corp. Like a draw, it is not an expense and is not taxed on its own, because the profit was already taxed to you through the K-1. Unlike a draw, it has rules about proportionality and basis.
| Entity (tax treatment) | Money to the owner is called | Payroll taxes | Income tax | Where it is booked |
|---|---|---|---|---|
| Sole proprietorship or single-member LLC | Owner draw | None on the draw; SE tax on the whole profit | On the profit, not the draw | Owner's equity (draws) |
| Multi-member LLC or partnership | Distribution, or guaranteed payment for services | None on distributions; SE tax on your share of profit and on guaranteed payments | On your K-1 share, not the distribution | Member's capital account; guaranteed payments are an expense |
| S-Corp (or LLC taxed as one) | Salary for work, then distributions of profit | On salary only | On salary (W-2) and on your K-1 share | Payroll expense; shareholder distributions (equity) |
| C-Corp | Salary, and dividends | On salary only | Salary as wages; dividends taxed again to you | Payroll expense; dividends (equity) |
If you are the only member of an LLC that has not elected to be taxed as a corporation, the LLC does not exist for federal income tax. Its profit is your profit, reported on Schedule C (or Schedule E for rentals), and you owe income tax and self-employment tax on all of it whether you took a dollar out or not. Taking money out is a draw: debit owner's draws, credit cash. Putting money in is a contribution: debit cash, credit owner's contributions. Neither touches the profit and loss.
The mistake owners make here is trying to pay themselves a "salary" from a disregarded LLC. You cannot be your own employee for tax purposes in this structure; a payroll run from a single-member LLC to its owner is a draw with unnecessary paperwork. The reverse mistake is booking draws as an expense (usually "owner salary" or "management fee"), which understates profit and gets corrected on audit with interest.
A multi-member LLC taxed as a partnership reports each member's share of profit on a Schedule K-1, and each member pays tax on that share whether or not it was distributed. Distributions themselves are tax-free up to the member's basis and reduce that member's capital account. Two rules matter in practice. Distributions have to follow the operating agreement, which usually means in proportion to ownership unless the agreement says otherwise. And a member who is paid for work, regardless of profit, receives a guaranteed payment, which is deductible to the partnership and ordinary income (subject to self-employment tax) to the member, and is booked as an expense rather than a distribution.
Keep one capital account per member, updated for contributions, share of profit or loss, and distributions. The K-1 needs the ending balance, and a member who takes out more than their basis has a taxable gain.
An S-Corp owner who works in the business must be paid reasonable compensation through payroll before taking distributions. The salary is wage income with withholding and payroll taxes on both the employee and the employer side; distributions are tax-free up to stock basis and free of payroll tax. The whole tax advantage of the S-Corp lives in that gap, which is why the IRS checks that the salary is real; our guide to S-Corp salary vs distribution covers how to set and defend the number.
On the books, salary runs through payroll (gross wages, withholding liabilities, employer taxes, net pay) and distributions go to a shareholder distribution account, one per shareholder, in proportion to ownership. Disproportionate distributions can be treated as a second class of stock, which can terminate the S election, so the proportionality is not a formality.
The fourth way owners take money out is the one nobody plans: the business card pays for groceries, a vacation, the kids' tuition. Those are not expenses of the business. In a disregarded LLC they are draws; in a partnership or S-Corp they are distributions, with all the rules above. The damage is twofold: the business's profit is understated, and the amount you actually took out is understated, which in an S-Corp widens the gap between salary and what you really received.
The clean habit is a personal card for personal spending and a "due to owner" account for the rare occasion the business pays something personal, cleared at month end. The failing habit is a dozen "miscellaneous" expenses that turn into a reclassification.
An owner with a single-member LLC, a partnership and an S-Corp takes draws from the first, distributions and maybe guaranteed payments from the second, and salary plus distributions from the third, all in the same year, all landing in the same personal checking account. On the personal side, a budgeting app sees five kinds of "transfer from business" and treats them the same. On the business side, each entity needs its own equity or distribution account per owner, and each has a different year-end requirement: the partnership needs capital accounts, the S-Corp needs distributions per shareholder and a basis schedule, the LLC needs a draw total.
Three habits keep this manageable. Move money to yourself from each entity separately and label it at the moment it moves, never through another entity. Keep the equity accounts per entity and per owner, and reconcile them at every close. And keep the personal side aware of which entity each deposit came from, because your lender, your estate attorney and your own tax forecast all need the split. That last part is what HaraPro is for: personal accounts sit next to each business, a deposit from Cedar Consulting is a distribution from that S-Corp and not a generic transfer, and the tax forecast knows which entity's treatment applies. The personal finance page shows the owner's side; one business is free forever.
A draw is money taken from a sole proprietorship or single-member LLC; a distribution is money paid to an owner by a partnership or S-Corp. Neither is taxed on its own, because the profit is taxed to the owner regardless, but distributions must follow ownership percentages and stay within basis.
Not for tax purposes unless the LLC has elected S-Corp or C-Corp status. In a disregarded LLC you are not an employee; money you take out is a draw, and self-employment tax applies to the whole profit.
No. The business's profit is taxed to you whether you draw it or not. Draws reduce your equity and have no tax effect of their own.
Yes, in proportion to ownership. Disproportionate distributions can be treated as a second class of stock and put the S election at risk.
They are draws or distributions, not business expenses. Reclassify them, keep a due-to-owner account for the exceptions, and use a personal card for personal spending so the business's profit and your withdrawals are both stated correctly.