Today we’re going to talk about a question we often get, can I take money out of my business account for personal use? The answer is, it depends. There’s a number of different factors that go into deciding or determining whether you can take money out of your business.
What is Your Business Entity Type?
What is your business entity type? That could dictate whether you can and how you can take the money out of business. A sole proprietor, when they take money out of their business, they simply take it as a distribution. There is no ability to pay payroll. That’s the same with a pass through entity such as a partnership. Distributions are available to sole proprietors, partnerships, as well as S corporations. You are able to pull money directly from the business in those types of entities.
When you’re talking about an owner distribution, you’re taking it out of the profits that the company has already earned and already been taxed on. You don’t take it as payroll in a partnership or sole proprietor, but you can take it as payroll as an S corp. If there’s owner profits that are available, you can also take that as a distribution as well.
S Corps and C Corps
In an S corporation you are able to be an employee of that entity. You take off your owner hat, which you’re an investor in. Then you put on your employee hat and you can get paid for the work that you’re doing for the company. An S Corp and a C Corp both have the ability for you to run payroll for yourself. In a partnership as well as a sole proprietor, you are not run payroll for yourself. Everything in a sole proprietor or partnership would come out as a distribution.
In addition for a C Corp, the other owner distribution in a C Corp is called a dividend. So a dividend is different from an owner distribution. It does come out of profits, but that’s directly taxable to you just like a dividend from, say, Apple stock. It would be subject to taxes. And you would have to pick that up on your personal income tax return if you had a distribution in the form of a dividend from a C corporation.
What is the Financial Health of the Company?
So besides the entity classification, the financial health of the company will also help determine whether you can take money out of the business. So when you’re looking at your cash flow, can that support your distribution as an owner? A lot of times what happens is a company will determine how much they need to keep in their accounts in order to cover the operational expenses that might be necessary.
There’s really no hard number here. It’s really based on the judgment of the owners as to whether or not how much money needs to be saved in the business and how much could be distributed. You would want to maintain some sort of cushion there to help pay for operational costs in the event that something happens.
All businesses are different. Some are more seasonal as opposed to even throughout the year. So you may have to hold more money during the slow times. Or depending on if you have to put out a lot of cash upfront before your customers get billed, then you have to wait to collect from your customers.
Should You Take Out a Line of Credit?
Now some people decide that they want to tap into a line of credit. We do suggest people have lines of credit set up for small businesses when they start. It is good to have that for cash flow in the event you didn’t get paid yet or if you have a larger purchase that needs to be done. You need to finance that right up front.
We do not suggest that you draw on that debt in order to distribute the money to yourself. That’s not as prudent of a business choice. We feel that it makes a lot of sense to keep that for operations. You don’t want to incur debt to pay yourself or to take money out of the company. What you should wait for is that profit net cash flow to be available to take as that distribution or that payroll.
Can I Take Money Out of My Business Account for Personal Use and Deduct it from my Taxes?
Sometimes people ask “if I am pulling money out of my company, is it a deduction?” Again, the answer is it depends. When there is an owner distribution or owner straw, that is not a deduction. That is not something that is going to come off the net income of the business. But if you are running payroll in an S Corp or C Corp, you would in fact get a deduction for that type of pay.
The owner distributions are out of the net profits of the company. So those monies have already been taxed and you don’t pay tax on that distribution. But you also kick it into production. So it’s “free cash” after you pay tax. Then same thing with payroll, though you as an owner are taking payroll out of the company. You have to pay tax on those pages on your personal income tax return, but the company also gets a deduction for all those payroll costs.
Conclusion
Hopefully we answered the question that we get all the time, can I take money out of my business account for personal use? We touched on the entity type dictating that as well as how much money is available. We also answered whether or not it counts as a deduction.
