A business owner operating as a sole trader or partner cannot put themselves on the company payroll and instead takes income through an owner’s draw, also known as a withdrawal. However, limited company owners must receive income through salary, dividends, or director’s loans rather than drawings. While withdrawals are allowed for certain business structures, they should be made carefully. We’ll explain what to consider, the types of owner’s draws there are, and who is eligible to withdraw capital from a business.

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What is an owner’s draw?

An owner’s draw refers to funds or assets taken from a business by its owner for personal use. In the UK, only sole traders and partners in partnerships can make owner withdrawals, as they are not considered employees of their business and do not receive a salary. Instead, they take money from the business’s profits. These withdrawals are not classified as business expenses and do not reduce the taxable profit of the company.

While withdrawals decrease the business’s assets, they do not impact the overall profit from an accounting perspective. Drawings should always be recorded properly, as they affect the owner’s equity in the business.

Tip

The opposite of an owner’s draw is a capital contribution. If you want to find out more about how to correctly record both types of transaction, you will find all the necessary information in our article on how to correctly book capital contributions and withdrawals.

Types of withdrawals

There are different forms of owner withdrawals, including:

  • Cash withdrawals – transferring money from the business account to the owner’s personal account.
  • Asset withdrawals – taking business-owned assets for personal use, such as tools, office supplies, or vehicles.
  • Use of business property – using business-owned property for personal use without permanently removing it, such as a company car for personal trips.
  • Use of business services – benefiting from business services for private purposes, such as having an employee work on a private project during business hours.

Certain business assets that are essential for operations, such as office space, major equipment, or property, cannot be freely withdrawn unless they are no longer in use for business purposes.

Who is allowed to make withdrawals?

Owner withdrawals are permitted for:

  • Sole traders – since they are not on a payroll, they take money from the business as drawings.
  • Partners in partnerships – they can withdraw funds from the business, provided they follow the terms set out in the partnership agreement.

However, limited company owners cannot take drawings. Instead, they receive payments in the form of a salary (if they are employed by the company) and/or dividends from profits. If a limited company shareholder withdraws funds from the company outside of these methods, it could be treated as a director’s loan, which has strict tax implications.

For business owners operating under an LLC structure, owners draw LLC rules may vary depending on the legal framework in place. LLC owners should ensure they follow tax and accounting regulations specific to their jurisdiction.

How are owner’s draws taxed?

Owners draw taxes can be complex, depending on the business structure. Withdrawals themselves are not taxed separately in the UK. However, sole traders and partners are taxed on the overall profit of the business, regardless of how much they withdraw. This means that even if an owner does not take any money out of the business, they will still owe income tax and National Insurance Contributions (NICs) on their share of the profit.

If assets or services are withdrawn, tax implications may arise. For example:

  • If goods or services are taken for personal use, they must be recorded at market value, and the business may have to account for VAT if it is VAT-registered.
  • If a business vehicle is used for private purposes, it may affect tax calculations related to business expenses.

For LLC owners, tax implications for owner’s draws can vary depending on whether the business is taxed as a sole proprietorship, partnership, or corporation.

How to record withdrawals correctly

It is essential to keep clear and accurate records of all owner withdrawals. Drawings should be recorded in the business’s books to reflect the reduction in the owner’s equity and assets. Failure to maintain proper records could lead to tax complications and difficulties in assessing the financial health of the business.

Understanding how to properly withdraw money or assets from a business is crucial to staying compliant with tax regulations and maintaining financial stability. If you’re unsure about the tax treatment of withdrawals, consulting a tax advisor or accountant is strongly recommended.

Please note the legal disclaimer for this article.

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