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Q: Profit Distributions for S-Corporation – Any way to Compel Distribution? ( No Answer,   1 Comment )
Question  
Subject: Profit Distributions for S-Corporation – Any way to Compel Distribution?
Category: Business and Money > Accounting
Asked by: q2222-ga
List Price: $20.00
Posted: 02 Jan 2006 21:05 PST
Expires: 01 Feb 2006 21:05 PST
Question ID: 428306
I am a partner with two other individuals in a small engineering
consulting business incorporated in the state of New York as an
S-Corporation.  We are equal shareholders, each holding 33.33% of the
corporations stock.  All are employees and draw salaries of between
$80,000 and $100,000 per year, plus bonuses typically of about 10% of
our salary, depending on business conditions. We have five other
employees and will do about $1,000,000 in revenue, with a corporate
profit of about $75,000, derived primarily from Federal Government
?Cost Plus Fixed Fee? type contracts.  I am considering leaving the
company to pursue other interests.  Neither of the other two partners
is interested in buying out my share of the company at this time, so
if I leave I will continue to hold company stock and thus be liable
for paying taxes on company profits, as I understand that Shareholders
are taxed on S corporation profits, whether the profits are
distributed or not (http://www.hrblock.com/sbr/resources/article_bus_struc.html).
I expect the company to be profitable over the next few years, but
retained earnings and future profit could vaporize if the government
contracts were lost.

My question is: with only my 33.33% of the voting shares, is there any
way to compel the company to distribute my share of the profit, or
could I be stuck paying taxes on profits that I never actually receive
(i.e, I get a Schedule K-1, "Shareholder?s Share of Income" with $25K
profit, but no cash!)?
Answer  
There is no answer at this time.

Comments  
Subject: Re: Profit Distributions for S-Corporation – Any way to Compel Distribution?
From: business1234-ga on 23 Jan 2006 08:58 PST
 
You're going about this the wrong way.

First thing - is there any sort of shareholders agreement with respect
to the stock.  If so, that controls.

Second, simply bust the S corp election.  If there is no shareholder
agreement, simply transfer the stock to an unqualified ownership
vehicle.  I.e. Give one share to a foreign charity.  That will
immediately bust the S corp election, no more money will flow through
to you and the corporation will have a hell of a time filing the
various tax returns and notices that it will need to in order to
comply with the tax rules.  It's such a pain in the butt that you
might just want to give your fellow shareholders the heads up that
you're about to do that and have them negotiate a shareholder
agreement with you in order to avoid the mess.

In addition, the s corp only has one year to distribute the previously
taxed income before they loose their S corp character and essentially
end up coming out second after current period earnings.  Google
post-termination transition period for these rules.

Third, look at state law.  There are corporate law doctrines of
minority shareholder oppression.  Based on the limited facts you've
provided, I don't think that this is probably a good case for it since
there is no majority shareholder, but threaten it nonetheless.  Again,
if you make yourself annoying enough, you might just get what you
want.

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