Question on "Owner's draw" for S Corp

[Aviator]

New client told by prior tax return preparer that he (client) is allowed as owner to take funds from his S Corp as owner's draw. I understand the distributions taken from basis but can find nothing allowing owners draw. At this point he has not taken any payroll compensation which I believe to be the appropriate method used by a corporate officer. I'm thinking he is confused between the two terms, i.e., "owners draw" and "distributions." (But then perhaps it is me who is confused?) Would appreciate any comments to help clarify this issue.

Thanks in advance.

Aviator

[appelman]

Is there really a difference?

between an owner draw and a distribution for a single-owner S-corp?

[S T]

Terminology

Owner's Draw refers to profits a sole-proprietor takes out of the business/company. Profits of the business/company are subject to self-employment without regard to the owner's draw.

Distributions are referred to as a similar type payment to an S-Corp Shareholder.

Distributions from S-Corp are not subject to self employment tax (withdrawal of current or previous years profits and not a deduction to the company will affect basis)

S Corp Shareholder, as we know should be taking a reasonable salary through payroll.

Sandy

[Lion]

Why?

Why did he change preparers?

The prior preparer may have given up trying to get him to take salary and gone to a plan B, such as making sure he labeled the funds he took out of the company account as Owners Draw and using that line item for nothing else, then preparer backed into payroll at the end of the year if a profit. Or, prior year had low profits with lots of previously taxed profits, so preparer had your client skip salary and take distributions instead for a year or two. Or preparer knew client was using QB/other bookkeeping method which uses the term Owner's Draw in the equity section.

Tell your client to take payroll. Ask him to contact you before taking distributions/owner's draw. Relabel his bookkeeping system to meet your needs.

[Aviator]

Question on "Owner's Draw" from S Corp

First, let me thank those who responded with their thoughts and advice; I appreciate you taking the time. As an added note, the S Corp is "new" in that it was established during 2009. The former tax return preparer (who has since retired), recommended the the S Corp status. One of the advantages given to me by the owner is that he was told that the owner's draw could be utilized. As I stated earlier perhaps this is merely a misunderstanding of terms. Obviously the differences must be explained to him. The situation will just have to be monitored closely and that a AAA account must be established and tracked.

Thanks again.

Aviator

[dsi]

Aviator,
2009 was not that long ago. Go back and calculate the SH basis, and reconcile the AAA. Also, your client must treat this corp differently than a sole proprietorship. He must not pay his personal debts by simply paying them with a corp check. He must pay himself, and then pay his personal debts from his personal account. "Arms length" transactions.