What the heck is an owners draw? Attorney books

Hi there, Linda Artisani, Artisani Bookkeeping. So this week we're going to be talking about what the heck is an owner's draw. You're going to see this in company files where you're working with a law firm or a partnership type of law firm, and you need to know what kind of entity it is to know when the partners actually take physical funds out of the business, how do you represent them in the books? It will vary by the business entity type. So you will normally see with law firms, you might see a sole proprietorship. That is typically a type of business that an attorney will start if they left a big firm. They're just starting out and they want to be able to just start out without any of the extra added task of filing with the— with their business with the state. It's the simplest way to do it. You are the firm. You'll see a lot of commingling on someone just starting out new, and typically they won't stay in that style very long. But starting out, it's very normal to see someone starting their business as a sole proprietorship. I did myself. So now there's no taxes per se, other than I would have to pay on the monies that I take out of the business. It's my owner's draw, and then I'll pay taxes on that and self-employment tax. That's why you don't see that one around too much, because it's just a straight-up tax you pay to the government. You don't get anything for it. No Social Security, nothing, no credit for it and it's at a higher rate. You might see a general partnership. So that might be a couple of attorneys left a firm, formed a general partnership. Again, very similar to sole proprietorship. They don't have any real business filings. It's not a formalized business. You want to make sure that you ask to see the partnership agreement because these are the kind of partnerships that if one of the partners messes up, both partners are equally responsible for anything that happens in the firm. And so it's really important to have that in any kind of partnership, have that document in place. Another type you might see is an LLP or an LLC. So LLC is limited liability corporation. And again, partners will be partner distributions, partner contributions in those type of firms. Any money coming out is a partnership distribution. So different than a sole proprietorship, which would be an owner's draw. You want to label your balance sheet or your chart of accounts in such a way that it matches the type of entity the firm is. Key thing to get that tax return when you're doing the initial file review, or if you've got the job right away, you want to at least get that tax return so you know the answers of what this business is. Sometimes asking the, the person that you're working with, your client, they might say, I'm not really sure. Don't find that happening too often with attorneys, but I do see that when I used to work with other firms. You might see— so now the partnership, they take the money out. They're liable. They have a corporate shield, so they'll have a corporate— they'll have to register with the state, so they do have some corporate protections there. But any money they take out is still a distribution. It's like the draw. They're gonna have to pay taxes on that. Sometimes you'll see an LLC that acts as an S corp. In that case, if they act as an S corp, you'll see that maybe the owners— you'll look on the chart of accounts and see that There's maybe shareholder distribution there. You might see a loan to officer. You might see stock or capital stock listed. Then you'll know that it's that S corp. And if you have a person you're working with that's an S corp, it has comma Inc. on their name, Inc. You'll know that the same thing, they're an S corp. You want to ask because it could be a C corp. But there are ways to take a look at that. And then in that case, you'd have shareholder distribution. You know, that's how you would structure that chart of accounts. You want to make sure it's right. Any money taken out there should be paid in payroll. You want to have a payroll there. If you should— the owner should be paid reasonable payroll. There are sometimes shareholder distributions and payroll, so you might see that in a corporation. With a C corp, you're going to see that there's a little bit more regulation there. They get more— there's more tax benefits, there's more tax deductions, but C corps are very— they're really heavily regulated. You want to check with your tax professional to make sure that the tax professional guides you through that. C corps pay their own tax bill. So the corporation actually pays the taxes due on the money that's earned or profit at the end of the year, where an S corp, it's a pass-through. So whatever's at the end of the year gets divided up between the partners. So that's something to consider, and you'll go get a K-1. at the end of the year for the, for the money that they have to put on their tax return. That's about all you're going to see. Typically it's LLCs I see a lot of times. You'll also see with some law firms that they're a partnership, they're an LLC, and then it— you'll see payments made to outside companies that are booked in as partner distributions, but they're paying maybe XYZ Company. When you see that, it's typically the attorneys will form S corps for their own monies and they'll push the money out of the partnership into the S corp and then have a payroll and pay themselves. So they're getting their payroll in and they can get their retirement plans through their own personal S corps and the partnership pays out that way to the S corps. So you might see that and you want to really talk to your business owner to say, hey, what does this— what kind of structure do you have in place with these payments that might be going out to businesses that you're not really sure, but you're seeing them book through that flow. So I'm going to take you now into QuickBooks and show you a little bit of the structure that I like to set up, especially with partnerships. We do see that a lot, typically with law firms. So I'm going to show you how I like to set it up. I'll also show you a little bit of what it looks like with a corporation because I've got both on this one file, on my demo file. Like I said, demo file is kind of like— it's like a catch-all. You would also— it's the things in it. It's not exactly the perfect file, but It's used for doing videos like this. So it has a lot of different things. You won't see an S corp listed with partners, and you wouldn't see that on one person's books. Let me take you to my file and I'll show you what I'm talking about. So here we are in the chart of accounts. Just go to accounting and you can pull up the chart of accounts. And like I mentioned earlier, you're going to see capital stock on an S corp. You're going to see shareholder distribution. Normally I would name it shareholder distribution Ardisani, shareholder distribution, Prevost or something like that. If we were— Sarah and I were both in a corporation. You also see if it's a sole proprietor, you'll see owner's pay and all that. That kind of— it comes with the file when you get a brand new file with QuickBooks. I'm not a big fan of the words owner's equity account. And then underneath that, owner's contributions, owner's distributions. That's the way I like to see it. Sole proprietor is only one owner there. Partners, a general partnership would be the same. It would be the same as far as the partners Partner equity, partner distribution, partner contribution. So here you can see I set up partners equity here with McBeal, and I've got partner distributions, Ali McBeal. And then I would also want to make a partner contribution, Ali McBeal. So let me come up here and I'm going to do that right now. I'm going to make a plus sign, go here and make an equity account. I'm going to come down to the equity section, typically in the 3000 numbers if you're numbering it. And then Partner Contributions. I'm going to make this say Ally McBeal, just like the Partner Distribution account. And then I'm going to come here and make it a subaccount so that way they can see. We can kind of collapse it down and Save and Close. And you want to keep them all the same type, obviously. So when you come down here, you'll see As I bring it down here, you really want to see it listed partner equity McBeal. And then I would do the same thing with Alicia Florick, partner equity Florick, distribution, contribution. You want to have it listed this way. You can see I've got shareholder distribution down here. I mean, obviously this is— this should have been a sub-account of under here. Like I mentioned earlier, I'd like to see the names there. That's just a couple of ways you're going to see that on the, on the books, you want to make sure that you keep a really clean chart of accounts for your client, especially if you know the entity. You really want to clean it up and make the balance sheet have the right terminology. It's important. You want to see that capital stock if it's an S corp. So that's about it for going through some of the chart of accounts and understanding it. I've got a very detailed blog post with all the different entity types, all the different little personalities each one has and benefits or maybe not benefits. You can take a look at the blog post to see more detail. I hope that helps. I hope it's helpful to you. If you have any questions or comments, please feel free to reach out. The easiest way is through my Facebook page, Artisanal Bookkeeping. You can also join us in our Facebook group, QB Community Live. It's a general business Facebook group and we have Quite a few members. We're getting upwards towards the 2,000 mark. I also have a Facebook group called the Accountant's Law Lab and a private group where we meet once a week and brainstorm all things accounting and law firms. So I hope you join me there. If you are an attorney that needs help setting up your books or getting through any of this, please reach out. We're more than happy to help you. On that note, I wish you all a wonderful, wonderful week. Bye now.