Discussion:Distributions to S-Corp shareholders

My husband and I are 10% shareholders in an S-Corp. The other couple are 90% shareholders. Over the last 5 years, the S-Corp has lost money the first 3 years and had a profit the last two years. For 2006, profits/K-1 amounts were $1500/13500 (10% to us, 90% to them).

The original investment in the S-Corp was our money---$15,000. The 90% shareholders did not have an original investment. With the 2006 profits, we both have a basis in the S-Corp......ours being the larger basis.

With the additional $13,500 being added to the other couples income, suddenly the S-Corp needs to start paying distributions. (Lesson learned not to mix friendship and business.....ever!!)

Finally my question.........

Does the distribution need to be based on the shareholder % or can it be based on each shareholders basis? I'd like to try to get some of my $15,000 back, but at 10%, it may take a long time if we need to stick to sharehold %.

Thanks for your help.

As far as basis, the prior year losses would have reduced your basis. Are you sure that after all of the losses you still have basis? If the other shareholder's contributed nothing in prior years they have no basis and could not have been able to deduct the losses. They should have carryovers to offset the current year income.

~~Taxmanager

We do have a local CPA firm doing our return.

Last year the company grossed about $160,000, with about $65,000 of that going to salary (one of the other 90% shareholders is the only employee). Other costs are product, office, etc. The salary cost also includes about $9,000 in health insurance that the company pays. The only start up costs were the $15,000. They had the "idea" and did not have a cent of cash. We have talked about marketing the company to sell, but the other owners are not in a hurry, as they are making a living off the company. We are basically frustrated silent partners.

Is there any way we can get back part of our original investment via a distribution or something else? We told the other shareholders that we would like to be bought out, buy they have no money.

JR----what type of red flags do you see?

Thanks again.

The prior year losses were not big.....so not much affect on the basis, but did consider that.

Question....... Could the S-Corp distribute $2,500 to the 90% shareholders (assuming enough basis) and $2,500 to the 10% shareholders (this via notes payable)? If this is possible, could the notes payable be repaid upon sale of company?

Other item, you said the s corp paid $9,000 for se health ins for the 90%. That has to get added to his W-2. It's not a deductible expense to the s corp. In otherwords box 1 of the W-2 s/b $74,000.

Look at your past K-1s. It should indicate the amount of adjustment to your investment. The losses reduce it, the gain increases it. You can only take a distribution if ther is a credit balance in the AAA.

Too many issues to deal with here. You need professional help.

The W-2 was handled correctly. That is the other reason they are wanting some money to cover their bottom line. Not only do they have to add $9000 to their income for the insurance, they also need to add the $13,500 from the K-1s. Their W-2 was withheld bearly enough to cover just the W-2 wages without the insurance added.