Spouse partnership LLC EQUITY/DRAW QUESTIONS!!!

[kram2724]

My wife and I recently started a photography business and turned it into an LLC in which we are 50/50 partners. Using quickbooks pro 2014

I have questions regarding owner equity/owner draw. As of now the whole time I have been using owner equity to record all the personal money we put into the business to start it and as I took some money out to kind of pay back that loan or investment I subtracted back from that equity account. We both have an equity and draw account set up in each of our names in QB's by the way. And I have been using my wife's owner draw account to track an pay her for her work.

But as I'm learning and getting everything lined out for taxes I don't think I'm doing this correctly. Please help in anyway you can and try not to be too rough on my as I'm a railroader by trade and not full time businessman. Thanks

[Freelancier]

IANAA, just in case you wondered. But here's what I do:

Yes, owner equity is the money you put into the business. However, you aren't decreasing that by taking a portion of the profits out. You're really taking them from "retained earnings" (basically all the profits you haven't taken out of the business) on the balance sheet.

What I do is have a separate expense account called "owner dividends" and apply the checks against that. That reduces profits, which reduces retained earnings.

But your best bet would be to chat with your accountant to find out what account she wants you to apply these draws against.

[Evan]

What I do is have a separate expense account called "owner dividends" and apply the checks against that. That reduces profits, which reduces retained earnings.

But your best bet would be to chat with your accountant to find out what account she wants you to apply these draws against.

Dividends isn't the right term either, as this isn't a corporation. You also aren't taking "owner draws" but "member draws". Though if it's being paid for your work there, it may be a guaranteed payment.

If it's a true draw -- if you do your method I'd make it an "Other Expense" so you know this isn't an expense.
If it's a guaranteed payment -- I'd put it up with where salaries are but call it Member's Guaranteed Payment.

The difference is if you have a 50/50 split of net income of $100K, and as part of that $100K was a $30K guaranteed payment to me, my reportable income as a member would be $50K (50% of $100K) + $30K. If I just withdrew $30K during the year, net income in this situation would have been $130K and my portion would have been $65K, less my $30K in withdrawals, leaving me net equity of $35K. Compared to situation above where I had equity of $50K. Makes a big difference -- maybe not here, but in many businesses it does.