Is Equal Distribution Needed In S-Corporation Shareholders?

The most common corporate entity in Florida is S-Corporation due to the protection it offers to shareholders, mainly because of its pass-through taxation benefits. In Florida, particularly in Miami, as a center of growing new business, the equal distribution in S-Corporation is one of the many benefits that attract many corporate entities. 

However, the equal distribution in S-Corporation can be challenging if the standards are not met as required by the Internal Revenue Services (IRS).

S-Corporation defined 

For the IRS tax purposes, a corporation or business entity such as a Limited Liability Company (LLC) can elect to be treated as an S-Corporation. However, it should be a domestic corporation and organized in Florida as an LLC, have domestic shareholders with an allowable number, no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation. 

Under federal tax purposes, an S-Corporation elects to pass corporate income, and credits through the shareholders, losses, and deductions. The report of flow-through of the shareholders’ income and failures on their tax returns is assessed through their individual income tax rates and not with the corporate tax rate. 

Florida has no state income tax, making the S-Corporation more lucrative as individuals pay only income tax through the pass-through earnings at the federal level. No income taxes at the state level.

Meaning of a Shareholder Distribution

The S-Corporation distributes earnings, called shareholder distribution, and pays them out as dividends to the corporation’s shareholders which are subject to tax on the shareholder’s individual income tax return. Known as “passing through,” the corporation’s shareholders’ income is taxed as personal income, avoiding double taxation. 

Shareholders living in Florida can take advantage of this without state income taxes. Distributing the income through shareholders allows them to receive their distribution and to pay federal income tax on individual rate than the corporate rate. 

Since the S-Corporation may only issue one kind of stock, the distribution of shareholder’s earnings should always be proportionate with their holdings in the corporation.  

Can there be an unequal distribution with shareholders?

Whether there can be unequal distribution with shareholders varies and depends on the meaning of unequal distributions. The shareholders have various stock holdings in the corporation, and if the unequal means not equal to each share, that may be the case. 

For example, a Florida LLC that elected to be an S-Corporation, if four shareholders have had increasing holdings of 50%, 30%, 20%, and 15%, each shareholder will get distribution in proportion to their holding of stocks in the corporation. 

However, when one of the three shareholders in the above example did not receive their allotment based on their holdings of 50%, 30%, 20%, and 15%, it is unequal. 

What if Unequal Distribution in S-Corporation happens? 

The IRS can revoke the S-Corporation election if they reassess the corporation. Unequal distribution is not allowed under the tax code, meaning distribution that is not proportionate to the percentage held by a shareholder in a corporation and can lead to their reclassification. 

It may also include if salaries are not paid out in time by the corporation. 

We Want to Make Sure you Win.

We have handled similar cases, and we are sure that we can help you with this kind of concern. We have worked with the IRS countless times, and we have represented clients all over Florida, particularly in the Miami area. At Jurado & Farshchian, P.L., we have time for you. Call us at (305)921-0440 or send us an email at [email protected] to start a consultation.

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