Owner contributions and owner draws: how to record money between you and your business

If you are a sole proprietor or a single member LLC, money moves between you and the business all the time: you fund the account when it runs low, and you pay yourself when there is profit. Neither of those is a sale or an expense, and categorizing them as such is one of the most common ways small business books overstate or understate profit.

Owner contribution (owner investment)

When you transfer personal money into the business account, the business did not earn anything. It received capital from its owner. Categorize that deposit as Owner's Investment, an equity category. It will not appear on the profit and loss, and it will show up on the balance sheet as part of owner's equity, which is exactly where it belongs.

If you categorized it as income instead, your revenue would be inflated, and so would your taxable profit. That is a mistake that costs real money in April.

Owner draw

When you move business money to your personal account, or pay a personal bill from the business account, that is an owner draw. Categorize it as Owner's Draw, also an equity category. It is not a business expense, which means it is not deductible, and it should not reduce the profit shown on your profit and loss.

Paying yourself a draw is how owners of pass through businesses take money out. The business profit is what gets taxed, regardless of how much you drew.

Draws are not transfers

A transfer moves money between two accounts inside the business books, like checking to savings, or checking to the business credit card. A draw or a contribution crosses the line between the business and you personally. Mark the former as transfers. Categorize the latter to the equity categories. Marking a draw as a transfer hides it from every report, and you lose the ability to see how much you actually took out this year.

In SmallBooks

Owner's Investment and Owner's Draw are in the default chart of accounts and available in the category pickers on the Transactions page and in rules. If you regularly move money to the same personal account, create a rule (for example, a Zelle description that matches your name) pointing to Owner's Draw, and every future transfer categorizes itself.

What your accountant expects

• Owner's Investment for money in from you, Owner's Draw for money out to you.
• Neither on the profit and loss. Both on the balance sheet under equity.
• If you run an S corporation, the rules differ: salary is payroll and distributions are their own thing. Ask your CPA before categorizing.