An owner’s withdrawal, sometimes called a distribution, is a payment of cash or assets from a partnership or sole proprietorship to one of its owners. In other words, an owner’s withdrawal is when an owner takes money out of the company for personal use. Corporations classify their shareholder payments differently. C corporations call their owner payments dividends and S corporations classify their shareholder payments as distributions. Since S corporations are treated much like partnerships, their distributions affect the shareholders’ equity accounts similar to how partnership withdrawals affect owners’ capital accounts.
When a partner in a partnership takes money out of the company for personal reasons, the cash account is credited and the partner’s withdrawal account is debited. When the accounting period is closed, the withdrawal accounts are closed to the capital accounts by a closing entry. This shows that the withdrawal decreases the partner’s equity stake in the company, but does not affect his ownership share.
Capital accounts and ownership percentages are typically not related in partnerships. Profit, loss, and voting percentages are determined at the formation of the partnership and typically are not affected by the capital account balances of each partner.
Sole proprietorships, on the other hand, don’t have to worry about capital accounts because the owner is the business. There is no separation. Sole proprietors do have to keep track of tax basis for tax purposes though.
Let’s take a look at an example. Assume Mike has a 50% share of Blue Guitar, LLC. This is a limited liability company that is treated like a partnership. He decides that he wants to buy a new car, so he withdraws $10,000 from his share in the partnership. Blue Guitar, LLC would record a debit the Mike's capital withdrawals account and a credit to cash for $10,000.
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