Are sub-S corporations required to distribute all net income to stockholders or canit reinvest it to finance growth?
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Are sub-S corporations required to distribute all net income to stockholders or canit reinvest it to finance growth?
We have a subchapter-S corporation. Each year we distribute enough of our net income to cover stockholder’s taxes at the maximum taxable rate. The rest is reinvested in the business to finance the company’s growth. One minority stockholder (19%) is complaining that we do not distribute all our net income. He believes that what we are doing is some how “fraudulent”. Is he crazy or correct?
Asked on March 5, 2012 under Business Law, Ohio
Answers:
Ronald Cappuccio / Ronald J. Cappuccio, J.D., LL.M.(Tax)
Answered 12 years ago | Contributor
S corporations are not required to make any distributions. For tax purposes, the income passes through to the shareholders even if they do not get a distribution. You are wisely distributing enough income to assure the shareholders can pay the taxes without having pure "phantom income."
Do you have a buy/sell agreement? Is there a way you can buy the disgruntled shareholder's shares. You should definitely talk to an experienced tax and business attorney.
I hope this helps!
Ron Cappuccio
www.TaxEsq.com
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