USA S-Corp - Two Shareholder's Profit Distribution after Salaries

[jamesmotley]

We have a S-Corporation with two owner/shareholders. The split is not equal, being 66 shares for one and 34 shares for the other owner. We want to have both take a "Reasonable" salary of $40k per year each. This seems to throw the distribution of profits off though if we then split the remaining income as distributions split 66 to 34 percent. The 34 share owner ends up with more since they already took an employee salary equal to the 66 share owner's salary. Also payroll taxes are paid on each of course.

How do we still make this fair in light of the equal salaries prior to profit distribution?

We use QuickBooks Online, wondering how things should be setup there to handle this properly.

 

[Tyson]

So A and B both have salaries of $40k. Let's say profits are $10k. $6,600 is attributed to A and $3,400 is attributed to B. What are you wanting to change here?

 

[LLCOOLES]

So A and B both have salaries of $40k. Let's say profits are $10k. $6,600 is attributed to A and $3,400 is attributed to B. What are you wanting to change here?

You have done well in understanding that you must both take a reasonable salary for yourselves, which you have stated to be 40K each. What I don't understand is the salary which was taken by the 34% shareholder that was equal to the 66% shareholder. The only salary that should be taken is the reasonable salary you have decided on. S Corporation shareholders are required to take distributions pro rata, that is according to their basis in the company. Example: A contributed a total of 66% of the assets the company has, and B contributed 34% of the assets the company has. If these rules were followed, then the 34% shareholder should not receive more total money than the 66% shareholder. If profits to be distributed are 10K then A's total income would be $46,600, ($40,000 reasonable salary + $6,600 profit distribution) B's income should be $43,600 ($40,000 reasonable salary +$3,400 profit distribution). I truly hope that you are tracking your basis so that you don't have to pay extra taxes on your distributions. If your distributions are larger than your basis, you will also have to pay a capital gains tax on that amount. Hopes this helps you out. (e-mail address removed)