Owner Distribution: The New Era of Accounting

What is Owner Distribution?

Owner distribution, also known as member distribution, is an accounting term that refers to the distribution of profits or losses to the owners of a business. In other words, it is the process of allocating the company's net income or loss to its owners.

Types of Owner Distribution

There are two main types of owner distribution:

• Current distribution: This is a distribution of profits or losses that is made to the owners on a regular basis, typically monthly or quarterly.
• Liquidating distribution: This is a distribution of profits or losses that is made to the owners when the business is dissolved or sold.

How Owner Distribution is Calculated

The amount of owner distribution is calculated based on the ownership percentage of each owner. For example, if a business has two owners who each own 50% of the business, then each owner would be entitled to 50% of the profits or losses.

Taxation of Owner Distribution

Owner distribution is generally taxed as ordinary income to the owners. However, there are some exceptions to this rule. For example, if the owner distribution is made from a qualified retirement plan, then it may be taxed as capital gains.

Benefits of Owner Distribution

There are several benefits to owner distribution, including:

• Provides a regular income stream to the owners: This can be helpful for owners who rely on the business for their livelihood.
• Allows the owners to share in the profits of the business: This can incentivize the owners to work hard and grow the business.
• Can help to reduce the overall tax liability of the business: This is because owner distribution is taxed at a lower rate than corporate income tax.

Drawbacks of Owner Distribution

There are also some drawbacks to owner distribution, including:

• Can reduce the amount of money that is available for reinvestment in the business: This is because owner distribution is paid out to the owners rather than being reinvested in the business.
• Can create conflict between the owners: This is because the owners may have different ideas about how the profits should be distributed.
• Can be difficult to manage if the business has a large number of owners: This is because it can be difficult to track the ownership percentage of each owner and to calculate the amount of distribution that each owner is entitled to.

Common Mistakes to Avoid

There are several common mistakes that businesses make when it comes to owner distribution, including:

• Not having a written agreement: This can lead to conflict between the owners about how the profits should be distributed.
• Distributing too much money to the owners: This can reduce the amount of money that is available for reinvestment in the business.
• Not taking into account the tax implications of owner distribution: This can lead to unexpected tax liability for the business and the owners.

Tips for Effective Owner Distribution

There are several things that businesses can do to ensure that owner distribution is effective, including:

• Have a written agreement: This agreement should outline the ownership percentage of each owner and the rules for distributing profits and losses.
• Distribute money regularly: This will help to provide a regular income stream to the owners and to avoid conflict.
• Take into account the tax implications of owner distribution: This will help to minimize the tax liability of the business and the owners.
• Consider the needs of the business: Make sure that the amount of owner distribution does not reduce the amount of money that is available for reinvestment in the business.

What is the Best Owner Distribution Strategy for Your Business?

The best owner distribution strategy for your business will depend on a number of factors, including the size of the business, the number of owners, and the financial needs of the business. It is important to carefully consider all of these factors when developing an owner distribution strategy.

Conclusion

Owner distribution is an important part of business accounting. By understanding the different types of owner distribution, the tax implications of owner distribution, and the benefits and drawbacks of owner distribution, businesses can make informed decisions about how to distribute profits and losses to their owners.

Additional Resources

• IRS Publication 541: Partnerships
• S Corporation Taxation
• Limited Liability Companies