When are shareholders entitled to shareholder distributions?

A shareholder distributions is a company’s payment of money, products, or cash to its shareholders. Shareholders distribution is a way to take money or property from your business. A shareholder distribution is generally taxed as a dividend to the shareholder.

Author: Brad Nakase, Attorney

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Main takeaway – Both dividend and shareholders distribution are corporate forms of returning its income to its owners, but a shareholder distributions goes to the shareholders of an S corp, not a C corp. On the other hand, S-Corporations don’t generally pay dividends. Dividends are paid by C corporations.

A shareholder distributions means any distributions of money or other property from the corporation to its shareholders that may constitute a return of investment for income tax purposes. The difference between a dividend and a shareholders distribution is, a shareholder distribution is current year profits; whereas dividends distribution is the preceding year’s profits.

From a tax perspective, shareholder distribution may be categorized in one of three possible ways: dividends, return of capital, and gain. While an S corporation does distribute profits to its shareholders, they are not considered dividends because that term specifically refers to profits paid out after taxes. An S corporation is not subject to corporate tax.

In this article, our Irvine business lawyer answers the most important inquiries about shareholder distribution as follows:

1. What are the distributions to shareholders by a corporation?

2. What is the difference between a shareholder distribution and dividend?

What are the distributions to shareholders by a corporation?

Shareholder distributions are profit distributions that an S Corp pays to shareholders. Shareholder distribution is a property or cash payment from the corporation to the S Corp’s owners. S corp shareholder distributions are the earnings by S corporations that are paid out as dividends to shareholders. If a shareholder receives a non-dividend distribution from an S corporation, the distribution is tax-free to the extent that it does not exceed the shareholder’s stock basis. A corporate officer’s salary is not a shareholder distribution. A salary is a compensation for work performed. A shareholders distribution is a corporate income or property distributed to a shareholder.

What is the difference between a shareholder distribution and dividend?

Both dividends and distributions are corporate forms of returning income to its shareholders. A distribution is a payment from a mutual fund or S corporation, mostly cash. A dividend is a payment from a C corporation, usually cash or additional shares. C Corp’s shareholder dividends are paid with after-tax money at the corporate level; S corp’s shareholder distributions are paid to shareholders with before-tax money at the corporate level.

Dividends are paid by C corporations after net income is calculated and taxed. An S corporation is not subject to corporate tax. While an S corporation does distribute profits to its shareholders, they are not considered dividends because that term refers explicitly to profits paid out after taxes.

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