Many small business owners are passionate entrepreneurs. The main driving force behind their operations is to see their businesses succeed. They constantly think of ways to increase their company’s financial health and invest in smart opportunities. These goals are great, but it’s also important to benefit from the results of hard work. Owners deserve to enjoy some of the profits from their companies.

What’s the right way to withdraw funds from your company? As a business owner, how should you record the transaction on your business reports and tax forms? This guide can help you do everything by the book.

What Type of Business Do You Own?

One of the main factors that determine how you get paid as a business owner is the type of company you have and what your role is. If you’re a sole proprietor, the process is simple: you can draw from funds as you see fit. Things are a little different for partnerships (distributive share) and corporations (dividends).

Many business owners think they need to pay themselves a salary, but that’s not needed unless you’re employed by a corporation, such as a CEO named by the board. With other types of businesses, no salary is needed for the books.

One other note to keep in mind is that limited-liability companies don’t operate any different from their basic structure for tax purposes. In other words, a single-person LLC works the same as a sole proprietorship, and a multi-member LLC is identical to a partnership.

How Do You Pay Yourself in a Sole Proprietorship?

When you’re the exclusive owner of a business, you perform a draw when you want to take money out of the company. You’re not considered an employee, so you don’t receive a paycheck or any type of salary. There’s no need to withhold state or federal taxes or take out taxes for social security.

Think of the money you draw as funds you have invested. You don’t need to fill out any forms to put more money into your business, and you don’t have to follow any complicated procedures to take it out again, either. You can transfer funds as needed or write yourself a check.

How Are Draws Taxed for Sole Proprietors?

Any sole proprietor business owner is required to pay self-employment taxes. When your company makes a profit, you pay taxes on the amount. If you withdraw funds from the business, you have to pay income tax for the amount on your personal tax return.