Important safety tip for S-corps

Important safety tip for S-corps. This also applies to LLC’s being taxed as S-corps.

If you have more than one shareholder, distributions MUST be made in proportion to the ownership percentages. If you make dis-proportionate distributions, then you jeopardize your S-election. This would have disasterous tax consequences.

If the company wants to compensate a shareholder differently (for example to reward the shareholder for landing a new contract) then some other compensation arrangement, such as a paycheck bonus, must be used so that distributions remain in sync.

So check your distribution totals. If you’re out of sync with the ownership percentages, work on getting back on track before your next tax return is due.

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