I'm a single member LLC with a question about owner's draws.

by Susan
(CT)

What is the difference between owner's draws and guaranteed payments? I take a draw each month based on the net profit in the LLC for the month so the amount varies month-to-month. How is this treated in the LLC and are the owner's draws considered income to me? If so, do I have to pay income taxes on the owner's draws? If they don't show as part of my income and are not taxable, can I show them as income to a mortgage co. for the purpose of refinancing?

Thank you in advance for your assistance.

Answer

Some definitions first:

A 'draw' is a withdrawal of the LLC's earnings. A member usually won't not take a draw unless there are profits.

A 'guaranteed payment' is money that a member takes out of the business whether there is a profit or not.

For income tax purposes you are charged with recognition of your LLC's profits regardless of your draws. Tax recognition and flow of money are two separate things in an LLC.

Example:

If the LLC made a $20,000 profit, then you will report it through your Schedule C. You DO NOT report that same $20,000 a second time due to the fact that you withdrew it during the year as the owner's draw.

In terms of showing your income to a bank, you can show them copies of your tax return which will have your Schedule C (or if you're a multi-member LLC, copies of the 1065 and K-1).