Small business owners work hard to earn money and a proprietor's draw is one way of reaping the financial benefits of this hard work, specifically by taking money out of a business account to cover personal expenses. An owner's draw is usually taxable because it is a withdrawal of taxable earnings, although the relationship between taxable income and money withdrawn is not always direct, especially in a sole proprietorship. Owner's draws are taxed differently by the IRS based on the way a business is structured.

Sole Proprietorship Income

According to the IRS, a sole proprietor's income is the amount left over after subtracting deductible operating expenses from incoming revenue. The amount that the IRS taxes as profit does not correspond directly to the amount of operating capital that the business has or the amount left over for a personal draw. For example, if a business buys a piece of equipment and depreciates it over five years, the money will be spent all at once, but the proprietor will deduct its cost over five years.

Sole Proprietorship Draw

A sole proprietorship is taxed on its income, or profit, regardless of whether the owner withdraws the money or leaves it in a business account. The IRS treats a sole proprietorship as legally and financially inextricable from the individual who owns and operates it. For sole proprietorship tax purposes, money sitting in a business account might as well be money sitting in a the owner's personal account because both accounts belong to the same taxable entity. However, a sole proprietor cannot withdraw money from a business account unless his business has enough on hand to pay him, and this available capital usually comes from taxable business sales revenue.

Patrnership Income and Draw

A partnership is similar to a sole proprietorship in that it is taxed on profit rather than directly on owners' draws. However, it differs from a sole proprietorship because it is owned by multiple partners who must track and balance money that they withdraw from the business to be accountable to the IRS and to each other. Business partners usually balance owners' draws and pay taxes in amounts that reflect the percentage of equity they own. For example, if ownership of a business is divided evenly, then both owners are entitled to draw half of the earnings and they are taxed on half of the profit.

Corporation Draw

Owners of corporations who work within their businesses usually earn fixed salaries, which are taxed at individual income tax rates. Additional amounts that the business earns are taxed at capital gains rates, which are usually lower. An owner's draw in a corporation can be either personal income or capital gains, depending on how it is paid, but both types of income are taxable. Corporations have bylaws that designate how and when the business will distribute profit earned in addition to owner salaries.

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