What is Shareholder Distributions?

In an S corporation, owners can receive money in two ways: wages through payroll, and distributions of profit. Distributions are not wages, are not subject to payroll taxes and are generally not taxable when received if the shareholder has enough basis, because the shareholder is already taxed on their share of the corporation's income through the Schedule K-1.

Reasonable compensation comes first

The IRS expects shareholder-employees who perform services to receive reasonable wages before taking distributions, as explained on its page about S corporation employees, shareholders and corporate officers. See S corporation reasonable compensation.

Pro rata distributions

S corporations can have only one class of stock, so distributions should be made in proportion to ownership. If one shareholder owns 60% and another 40%, distributions should follow those percentages. Disproportionate distributions can raise questions about the S election and should be corrected promptly.

Basis limits

Distributions reduce shareholder basis. Distributions above basis are generally taxed as capital gain. Shareholders should track basis every year.

In the books

Record distributions in an equity account, separate for each shareholder, never as an expense. Personal expenses paid by the corporation for a shareholder are effectively distributions too, unless reimbursed or treated as wages.

Distributions vs dividends

C corporations pay dividends, which are taxable to shareholders. S corporation distributions are different, though an S corporation with accumulated earnings from prior C corporation years has additional rules.

Compare with guaranteed payments for partners and see Form 1120-S.

Related terms

• Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
• Guaranteed Payments: Guaranteed payments are payments a partnership makes to a partner for services or use of capital, regardless of profit.

Browse more definitions in the small business glossary.