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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!)? |
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There is no answer at this time. |
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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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