An LLC draw refers to the method by which members (owners) of a Limited Liability Company (LLC) take money out of the business. In an LLC, members typically do not receive a traditional salary as employees do. Instead, they take draws, which are distributions of the business’s profits.
Here’s a breakdown of what an LLC draw entails:
- Profits and Losses: LLCs are typically taxed as pass-through entities, meaning the business’s profits or losses pass directly to the owners and are reported on their personal tax returns. The members can withdraw their share of the profits as a draw.
- No Payroll Taxes: Since a draw isn’t considered salary, it’s not subject to payroll taxes (such as Social Security or Medicare taxes). However, members are still responsible for paying income tax on the LLC’s profits, regardless of whether or not they take a draw.
- Flexible Timing: Members can take draws at any time, as long as the LLC has enough funds available to support the withdrawal. There's no set schedule like a regular paycheck, making it flexible for the members.
- Single-member LLC: The owner can take a draw from the profits of the business, but the IRS views the LLC’s income as the owner’s personal income, so no formal salary is paid.
- Multi-member LLC: Each member can take a draw, which is based on their ownership percentage or the operating agreement. The amount of the draw is determined by what the members agree upon, typically reflecting their share of profits.
While a salary is a fixed payment for services rendered, a draw is a distribution of the business’s profits. A salary is subject to payroll taxes and withholdings, whereas a draw is not. However, both require the member to pay income tax, and a salary is often required if the LLC is taxed as an S-corporation.
- Not an Expense: An LLC draw isn’t an expense of the business in terms of tax deductions. It’s just a distribution of profits.
- Owner’s Equity: A draw reduces the owner’s equity in the LLC. For accounting purposes, the money withdrawn is subtracted from the owner's capital account, reflecting their ownership stake.
- Cash Flow: Before taking a draw, ensure the LLC has enough cash flow to cover its operating expenses, debts, and future growth needs.
- Tax Implications: Members must pay taxes on their share of LLC profits, even if they don’t take a draw. It’s essential to set aside money to cover income taxes and avoid unexpected tax bills.
An LLC draw is a flexible way for owners to take money out of the business, but it comes with important considerations for taxes and cash flow management. If you're unsure how to handle draws in your specific situation, consulting with a tax professional is always a good idea.
