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  #1  
Old 09-01-2009, 01:35 PM
BlueLoos BlueLoos is offline
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owner's draw vs salary

Our company has 1 Director (husband), until now, all personal expenses have been listed as salary. The business is doing well, but we just tried to get a loan from the bank and because the P+L posts a whopping loss for last year, they refused. Part of that 'loss' is because we paid ourselves a very healthy salary :-) but am now wondering if we should have put all those expenses down as owner's draw instead (which is an equity rather than expense thing)?

We have no income tax where we live, so no tax issues involved in how we represent the data, but clearly, we'd like to show the bank that the company is healthy.

Should I re list all the director's salary as owner's draw or not?

As you can see, I have zip accounting experience!
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  #2  
Old 09-01-2009, 03:05 PM
Deidre56 Deidre56 is offline
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What type of entity is this? sole Proprietor? S-corp? LLC?
do you take taxes out of your checks and issue yourselves W-2's?
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  #3  
Old 09-02-2009, 11:01 AM
BlueLoos BlueLoos is offline
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we live on an island with no taxes and no requirement to file returns. there are 2 share holders (no dividends are paid) and 1 director. the director is one of the shareholders,
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  #4  
Old 09-03-2009, 01:57 AM
Joe Williams Joe Williams is offline
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It sounds like the company is a Corporation. If it is then all payments to the shareholders and Director would be a payroll expense. The Owner's Draw is for personal companies that are not corporations.
Are you required to file any yearly report to the island government?
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  #5  
Old 09-03-2009, 08:45 AM
BlueLoos BlueLoos is offline
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In so far as there are 2 shareholders, then I guess it is a corporation. We have to ensure that the company is re-registered every year, but that is all.

The other share holder does not receive any dividends (maybe because they didn't contribute any money to set up the company, just contributed their connections) and has never received any 'income' from the company.

Were we to list all the 'payroll expenses' for the director as 'owner's draw' how would this affect the balance sheet? or would we have the same set of figures: P+L that shows a loss (despite the fact that the company is currently solvent, able to pay all its bills) and a balance sheet that shows a positive figure.

Currently the bank will not loan any money because the P+L shows a loss, even though we are clearly making money and paying all our bills.
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  #6  
Old 09-03-2009, 09:25 AM
RobJoy RobJoy is offline
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I'm a bit perplexed by your bank's inability to read your accounts. Sure, you could remove the director's pay to an equity account, or to a dummy bank account called 'Directors loan'. But any bank manager with three brain cells wouldn't see much difference, since there are no tax implications (you lucky people!).

Moving the salary to the balance sheet will increase profits, but you will end up with the same total equity if the 'salary' is now in an equity account - you will have effectively moved it from one equity account to another. If you use a director's loan account instead you will increase an asset - it will be saying that the business has a bank account called 'Directors' Loan' in which it has some money. In other words, the director owes the business money.

I think your best option would be to change the salaries to dividends - an Other Expense account - still in the P&L, but it will show after 'Net Ordinary Income' - so your bank manager will see profit.
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  #7  
Old 04-15-2010, 11:10 AM
Breunlin Breunlin is offline
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"we live on an island with no taxes and no requirement to file returns" - must be a wonderful island! just curious, what island?
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  #8  
Old 04-15-2010, 09:15 PM
cojhl2 cojhl2 is offline
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Well here is the way I do this. It should make no difference what the tax implications are or how the entity is taxed.

Each Equity owner has a subaccount named "Untaxed Income". When a check is written that is not salary it is offset by that account.

Now payroll is payroll regardless.

The end result: 1)payroll claims taxes for individual income, and 2)Company owners regardless entity type one way or another pay taxes on profit.

Does this not cover it??
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