I am a small-business owner currently set up to be taxed as an S corporation. I am the only employee, and pay myself a reasonable salary. My fiancée and I were looking at ways to lower our tax liability before starting the company, and we ended up having her purchase 49 percent of the company’s stock. Is it okay to give her 49 percent of all distributions and no salary? She performs no essential role in the business; she is just a part owner. Also, I am taking home about $36,000 a year in salary, and another $110,000 in distributions. I am a residential real estate agent. My fiancée will take home another $105,000 in distributions. Is all of this proper?
This is not an easy answer. I recommend a review be done as to whether or not an S corporation status (I assume that this is the current structure) is the appropriate entity to conduct your business and achieve the desired results.
Assuming your business structure is still an S corporation, there should be reasonable compensation paid for all services rendered. After which, the income for the year should be allocated on a “per share per day” basis. Further, all distributions are required to be made in proportion to stock ownership. Thus, if a stockholder is a 49 percent owner, then that stockholder is entitled to 49 percent of distributions of the S corporation.
If the S corporation structure is too restrictive, you may want to consider an alternative structure, such as an LLC. This analysis, looking at the benefits and operational requirements, should be reviewed with a CPA that is knowledgeable in entity selection and the impact on employees and owners.
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Answered by: Nicholas J. Crocetti, CPA, is director of tax advisory solutions with CBIZ MHM LLC in Plymouth Meeting, Pa.