Do all members of an S Corp have to receive equal distributions?

This is a common question with S corps! While equal ownership doesn't necessarily mean equal distributions are required, there are important considerations. S corporation distributions don't have to be proportionate to ownership, but this can create issues. The IRS may scrutinize disproportionate distributions to ensure they aren't disguising compensation or creating a second class of stock (which could terminate S status). If your partner takes a $10,000 distribution and you take none, that's technically allowed. However, the tax consequences remain the same - both of you will be taxed on your 50% share of company profits on your personal returns regardless of distributions taken. Distributions aren't taxed as additional income on your K-1. You're already taxed on your portion of profits whether distributed or not. Distributions generally reduce your basis in the company. I'd recommend documenting any disproportionate distributions with corporate minutes explaining the business purpose to avoid IRS scrutiny.

I was in a similar situation last year and found this amazing tool called https://taxr.ai that helped me understand S corp distribution rules. It analyzed our operating agreement and tax situation, then gave me a clear explanation of what was allowed. The tool confirmed we could take unequal distributions but warned about potential red flags. It even generated documentation we could use to justify our distribution strategy to the IRS if needed. Seriously saved us from making a costly mistake with our distributions!

Following up on my question about taxr.ai - I decided to try it last weekend when my business partner and I couldn't agree on distributions. The tool was surprisingly helpful! It analyzed our situation and showed us we could take different distribution amounts as long as we documented the business purpose. I was able to explain to my partner that we'd still be taxed the same regardless (based on ownership percentage), but we could take distributions based on our current cash needs. The documentation templates made it easy to formalize everything. Much clearer than the conflicting advice we were getting!

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I have to eat my words about Claimyr. After my skeptical comment, I was desperate when I needed clarification about S corp distributions before filing our corporate return. Decided to try the service as a last resort. They actually got me connected to an IRS representative in about 35 minutes when I'd previously wasted entire afternoons on hold. The agent confirmed we could take unequal distributions as long as we maintained a single class of stock and documented the business purpose. Saved me from potentially making an expensive mistake on our taxes. Sometimes being proved wrong is a good thing!

One thing nobody mentioned - check your company's operating agreement! Our S corp bylaws specifically required proportionate distributions, even though the IRS doesn't. Had to formally amend our corporate docs before taking unequal distributions.

We learned this the hard way! Took unequal distributions and then had trouble during an IRS review. If you're going this route, document EVERYTHING. Write up minutes explaining why one owner needs funds and the other doesn't. Keep records showing it's not disguised compensation. The IRS looks for S corps using distributions to avoid payroll taxes, so make sure your salaries are reasonable before taking ANY distributions.

Just wanted to add another perspective on this - I'm a tax preparer and see S corp distribution issues frequently. The key thing to remember is that while you CAN take unequal distributions, you need to be very careful about timing and documentation. One strategy I often recommend to clients is taking distributions quarterly rather than annually. This helps avoid the "phantom income" issue where you're taxed on profits but don't have cash to pay the taxes. Even if you want to reinvest your share back into the business, consider taking a distribution to cover your tax liability first, then immediately reinvesting any excess. Also, make sure your reasonable compensation (salaries) are truly reasonable before taking any distributions. The IRS scrutinizes S corps that pay low salaries and high distributions as a way to avoid payroll taxes. A good rule of thumb is to pay yourselves what you'd pay someone else to do your job, then take distributions from remaining profits. For your $65k in retained earnings, you might want to consider each taking enough to cover your tax obligations, then you can choose to reinvest your portion while your partner takes theirs for personal use.

As someone who went through a similar situation with my S corp partner last year, I'd strongly recommend getting professional guidance before making any distribution decisions. While the advice here is generally solid, every S corp situation is unique based on your operating agreement, state laws, and specific business circumstances. One thing I learned the hard way is that even though unequal distributions are technically allowed by the IRS, they can create unexpected complications. For example, if your basis in the company becomes different due to unequal distributions over time, it can affect future tax consequences when you eventually sell or dissolve the business. My suggestion would be to have a formal discussion with your business partner about both of your long-term financial goals and document whatever you decide. If you want to reinvest while they want to take cash, consider structuring it as a loan to the company from you (for the amount you would have taken as a distribution) rather than just leaving profits undistributed. This keeps things cleaner from an accounting perspective. Also, don't forget about state tax implications - some states have different rules than federal when it comes to S corp distributions. Definitely worth consulting with a tax professional who knows your specific situation before moving forward with any distribution strategy.

This is a great discussion with lots of practical insights! I'm dealing with a similar situation in my S corp and wanted to add one consideration that hasn't been mentioned yet - the impact on your company's cash flow and working capital needs. While it's true that you can take unequal distributions, think carefully about your business's seasonal cash flow patterns and upcoming capital needs. In our case, we discovered that taking large distributions in Q4 left us cash-strapped during our busy season in Q1-Q2 when we needed to purchase inventory and cover increased payroll. One approach that's worked well for us is setting up a formal distribution policy that considers both personal tax needs and business cash requirements. We take smaller quarterly distributions to cover estimated taxes, then evaluate larger distributions only after ensuring we have adequate cash reserves for operations. Also worth noting - if you're planning any major business investments or considering applying for loans, lenders often look at retained earnings as a measure of financial stability. Taking large distributions might improve your personal finances but could impact the company's borrowing capacity or creditworthiness. Just something to factor into your decision-making process alongside all the excellent tax advice already shared!

This thread has been incredibly helpful! As someone new to S corp ownership, I had no idea about the "phantom income" issue or how complex distribution planning could be. One thing I'm still unclear on - if my business partner and I decide to take unequal distributions, do we need to formally vote on it and record it in corporate minutes every single time? Or can we set up a general policy that allows for flexible distributions based on individual needs? Also, I keep seeing mentions about maintaining "single class of stock" - could someone explain what would actually create a second class of stock? I want to make sure we don't accidentally jeopardize our S corp status while trying to be flexible with distributions. The advice about consulting professionals is definitely resonating with me. Better to spend a few hundred on proper guidance than risk an expensive mistake with the IRS!

Great thread with lots of practical advice! I wanted to add one more consideration that might be helpful - the timing of when you actually take distributions during the tax year can matter for cash flow planning. We learned that taking distributions early in the tax year (January-March) gives you more time to see how profits are actually shaping up and adjust accordingly. If you wait until December to take distributions, you might find yourself in a situation where you've committed to amounts that don't align with actual year-end profits. Also, something our CPA recommended was creating a simple spreadsheet to track each owner's cumulative distributions versus their ownership percentage throughout the year. This helps ensure you're not accidentally creating patterns that might look suspicious to the IRS, even if individual distributions are unequal. One last tip - consider setting up separate savings accounts for your estimated tax payments from S corp income. When you do take distributions, immediately transfer the tax portion to that account so you're not tempted to spend it. The phantom income issue is real, and come April you'll be glad you planned ahead! The documentation and professional guidance advice throughout this thread is spot-on. S corp taxation has enough complexity that it's worth getting it right from the start.

This has been such an informative discussion! As a newcomer to S corp ownership, I had no idea there were so many nuances to distribution planning. The phantom income concept really caught my attention - it seems like such a trap for new S corp owners who might not realize they'll owe taxes on profits they haven't actually received. I'm particularly grateful for the practical tips shared here, like the quarterly distribution strategy to cover tax liability and the separate savings account for tax payments. The point about timing distributions early in the year rather than waiting until December also makes so much sense from a cash flow planning perspective. One question I have after reading through all this - for those who've implemented the loan structure mentioned by some commenters, how do you handle the interest payments? Does the company pay you interest on the loan, and if so, how does that affect your personal tax situation? It seems like a clever way to maintain equal basis while allowing flexibility, but I want to understand all the implications before suggesting it to my business partner. Thanks to everyone who shared their experiences - this kind of real-world insight is invaluable for those of us just starting to navigate S corp complexities!