Some Short Term And Long Term Effects To Be Aware Of
When you own a business, there are many things to think about – from the initial planning stages and allocating resources, to marketing and long-term strategy.
But what about the owner draws? Ever wonder if taking owner draws could affect your business?
Believe it or not, they can have a significant impact on your bottom line.
SOME SHORT-TERM AND LONG-TERM EFFECTS OF OWNER DRAWS
As a small business owner your company is structured as either a sole proprietorship, a partnership, or an LLC for tax purposes. So taking owner draws seems pretty straightforward.
But drawing money from your company can have both short-term and long-term effects on the business.
In the short term, owner draws can be a convenient source of funding for unexpected expenses or for taking advantage of opportunities as they arise.
However, if it becomes a regular occurrence, it can put a strain on your company’s cash flow and make it difficult for you to meet financial obligations.
If you take too much money out of the business in the form of an owner draw, you may be subject to penalties from the IRS. You definitely don’t want to raise any red flags with the IRS!
In the long term, excessive owner draws can lead to problems with unexpected tax liability, putting your company at risk of being unable to meet its obligations to creditors, and even making it increasingly difficult to borrow money to support your company’s growth.
This practice could be a sign that your business is not generating enough revenue to cover its expenses as well as showing potential investors and lenders that you are treating your business like an ATM.
Leaving little to no equity in the business can also give the perception that you don’t believe enough in your business to leave that equity in it and continue to re-invest its own earnings. (Ouch! That one stings!)
Ultimately, this could all lead potential investors and lenders to view your business as a high-risk investment, making it difficult to raise any capital.
Moreover, if you are taking large draws relative to the size of your business, it could put a strain on your relationships with any co-owners or partners you may have.
It’s important as a small business owner to carefully consider the implications of taking money out of your company.
The key is to be mindful of the potential consequences and take measures to avoid them.
By being strategic about how and when you take draws, you can ensure that they don’t have a negative impact on your company.
Have you ever taken an owner’s draw from your small business? Have questions on whether it’s the right thing to do and how it can impact you during tax season?
Contact me today. I will answer all your questions and help set you up for financial success!