What Is a Partnership Draw?
With a partnership, the money a partner earns is her share of the profits from the business. Since business owners generally do not want to wait until the end of the year to get the payout of profits, a draw or drawing account lets a partner get money from the business to act as a regular income.
In a business organized as a partnership, the partners are not allowed to receive a salary. The business cannot pay a partner a wage and then take those wages as a business expense. The only income a partner receives from the business is his share of the business profits. A partnership draw allows the partner to pull a regular amount of cash from the business against his share of the profits.
A partner's drawing account is not an actual bank account. The drawing account is a bookkeeping or accounting entry to keep track of the money a partner takes as a draw. When the actual business profits and the partners' share of the profits are calculated, the amount taken as the draw is subtracted from the partner's share. For example, if at the end of the year, a partner's share of business profits is $100,000 and during the year he took draws in the amount of $80,000, the partner receives an additional $20,000 to cover the profits not previously taken as a draw.
Part of the partnership agreement should discuss how the partners get paid, including any draw arrangement. A draw can be set up in any manner agreed upon by the partners. A partner can get a flat amount each month with the balance of profits received after the annual results have been calculated, or can draw a percentage of the profits calculated on a monthly basis. For example, two partners can agree to draw 40 percent each of monthly profits, leaving the remaining 20 percent as capital to run the business.
The partnership as a business does not pay income taxes. Profits pass through to the partners to be included on their personal tax returns. As part of a regular draw, a partner may also want to make payments to the IRS to cover self-employment and income taxes due when her tax return is filed. The tax form 1040-ES allows a partner to send in estimated tax amounts during the year to avoid a big tax headache when tax filing season rolls around.