I started a business in July.  It is a sole proprietorship, providing
consulting services.  I have no employees, and one client.  I bill in
bi-weekly invoices based on a fixed hourly rate and the number of
hours I have worked.  I have received payments for those invoices,
with payments to continue as I continue to invoice.  This could go on
for several years in this fashion.  I am keeping records using
Quickbooks (Invoices, Payments received).  The payments go into my
business checking account. There are very few expenses (insurance,
some one-time expenses for office equipment), which are already paid
off.  There is positive cash in the business checking account.  Now I
personally need some money - need to pay myself from the business to
my personal account - as I have not had any personal income since
before July.  How do sole proprietors customarily handle this?

My question is mainly about what is customary for a sole proprietor,
no-employee, simple consulting business such as I have.  Everything is
very simple in my business and I want to handle the owner?s payments
in the simplest way possible now.  The final specific point is a
software question around recording the transaction in Quickbooks.

Specifically:

- How do I determine on the right amount to pay myself (and how much
gets left in the business account)?

- Should the pay be based on the amount of time I worked, and thus can
vary?  Or be a fixed flat amount every so often?  Or based on how much
cash is in the business to leave a fixed amount there after each
withdrawal?

- How often should the payments be made?  On a regular basis, or as needed?

- What happens at the end of the fiscal year (end of Dec, 2005)? 
Should I transfer all profits to myself or is there a reason to keep
some in the business?  If keep some in the business, how is that
determined?

- How do I create this transaction in Quickbooks?  I have looked in
the Help file and see some information but it leaves a question.  It
does say:

"Paying an owner or partner

Owners of sole proprietorships, as well as partners in unincorporated
partnerships, are not on the business payroll. Instead, they have
equity in the business. The equity of a business increases when the
business makes a profit.

Owners and partners can take money out of the business by drawing on
their equity. Payments to owners or partners are not business expenses
unless the person is being reimbursed for a business expense paid for
with personal

Recording an owner's draw

From the Banking menu, choose Write Checks .
Make the check out to the owner.
In the detail area of the check, assign the amount of the check to the
equity account that you use to record owner's draws.
Save the check."

My question about the above is: In Quickbooks Chart of Accounts, the
only two accounts with any value to them currently are my Business
Checking Account (payments received for invoices) and my Accounts
Receivable (waiting on payment for invoices already sent).   I see an
account in the list named Owner?s Capital, and it has two
sub-accounts, Draws, and Investments.  These currently have no
balance.  There is also a Retained Earnings account.  How do I use
these and/or other accounts to record the payments to myself?

I cannot recommend the book "Self-employed Tax Solutions" by June
Walker to you enough.  It comprehensively addresses these types of
questions.  Here is what it has to say:

"Many self-employed people have a misguided idea about their own
business profits.  They think that the weekly, monthly, or occasional
checks the right to themselves -- often called "draw" -- as their
income or their profit.  They are wrong.  The checks a self-employed
makes out to herself have no bearing whatsoever on her income,
expenses, profit, or taxes.  Whether you write yourself a $100 or
$1000 check every week, you are doing nothing other than altering cash
flow by moving money from one place to another.  It's called draw
because you are drawing money away from someplace."  (Page 128)

As a sole proprietor, you are your business for tax purposes. 
Therefore, it makes no difference what and when you "pay" yourself. 
You can transfer money from the business in any amount it can support
as often or as infrequently as you wish.

For the purpose of recording the transaction, I would credit Draws and
debit the Business Checking Account since you are taking cash out of
the account in the form of a draw to pay yourself.  Some additional
description of this can be found at:  "Sole Proprietor Owner's Equity"
QuickBooks Community, Intuit, Inc. (2005)
http://www.quickbooksgroup.com/webx/.eea7e1f?50@699.ZaCsaIowekF@. 
According to this source, QuickBooks will automatically maintain the
value of the Retained Earnings account, which will also be reduced to
reflect the draws.

Sincerely,

Wonko

Search terms:  QuickBooks draw sole proprietorship

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Request for Answer Clarification by ferret13-ga on 03 Nov 2005 06:18 PST

Hi.  Thanks for your time in attempting to answer this question. 
Unforutnately, I cannot see how your response answers any of the
specific questions I asked in any way.  It seems that you answered a
related, but different, question.

I have learned from your answer that "it makes no difference what and
when I pay myself".  Perhaps because of this you assumed that the
specific questions I ask don't matter.  However those answers are what
I was looking for.

Either that, or I'm so confused I don't recognize a good answer when I see it.

I'll compromise and offer: if you can add an answer to the year-end
question I asked, I will be satisifed.  I realize this is a small fee
and I'll mostly learn by doing, not by asking questions.

---

Clarification of Answer by wonko-ga on 03 Nov 2005 09:09 PST

Yes, I think you have missed the point of my answer.  I apologize to
my answer was unclear to you. Let me try to explain it to you again in
a different way.

Whether you leave any cash in the business or not, your tax liability
is unaffected.  So, as long as there is sufficient cash left in the
business's account to cover its expenses, you can withdraw as much
money as you need whenever you need it to meet your personal expenses.
 There is no right or wrong amount to pay yourself, as long as you do
not leave the business in a position where it is bouncing checks.

Personally, at the end of each month I would forecast what my next
month's business expenses would be and leave that amount in the
business account, taking the rest as a draw.  This method assumes you
have cash receipts each month and that each month's receipts equals or
exceeds each month's expenses.  If that is not the case, then you
would potentially want to keep more than one month's worth of expenses
in the business account.  Alternatively, you could always put money
back into the business account later if you came up short.  It has no
impact on your tax liability since you are your business for tax
purposes.  However, it does make your accounting more complex.

In summary, assuming you want to avoid transferring cash into your
business account to keep your accounting simple, you will need to
create a cash flow budget and time the amount and quantity of your
draws such that your business account never becomes overdrawn. 
Remember that whether you leave every cent of profit in the business
or pull out every cent as a draw, your tax liability is unchanged. 
Therefore, you want to figure out an approach to taking draws based on
the timing of your cash flows that leaves you with sufficient cash to
meet your personal expenses while simultaneously preventing your
business account from being overdrawn.

I hope this clarification enables you to better understand my answer. 
Because there are no tax implications, there is no right or wrong way
to do this.  However, the accounting is easiest if you leave
sufficient cash in the business at all times so that you do not have
to transfer personal funds into it to ensure adequate cash flow. 
Exactly how much this is will depend upon the frequency and
variability of your cash receipts and cash expenditures.

The following resource may be of use to you in preparation of a cash
flow budget: "Cash Flow Budget" CCH Business Owner's Toolkit (2005)
http://www.toolkit.cch.com/text/P06_4300.asp.

Sincerely,

Wonko

Thanks for your time and help.  Suggestion to check the specifics the
requester has to make sure you hit those with the answer.  The
clarification helps.

excellent question. this has been on the back of my mind forever. i
can't wait until its answered.

what if you are an s-type corporation, but you are the sole owner of
the business? do the same rules apply? what if you have multiple
owners?