To avoid unequal S-Corp distributions

[gosteelers]

Here is the senario:

An S-corp is to have additional 30% stock issued to new shareholders as of January 2008. The current group of shareholders want to take an equal distribution amongst themselves NOW before the new shareholders join. Here is the issue, they don't have the cash now, they are going to take out a bankloan for the cash. The bankloan may not come into effect until after the new shareholders come on board, at which point if they were to make a distribution it would be disproportionate.

Question: Is there a way to get the distribution on the books and tax return NOW before year end (shown as an equal distribution in regards to s corp stock) but actually paying the cash later when there are new shareholders who won't proportionally share?

[BOB W]

How about issuing a check to each shareholder for the amount needed. Have them endorse the checks and redeposit the checks into the corporate account as a loan. Draw up loan documents for each shareholder with stated interest.

The amount needed may not be easy to calculate until the EOY is completed. The check can be dated 12/31 and the deposit listed as "in transit" on the bank rec.

[Golden Rocket]

Dividends

Another easy way without involving a shareholder loan is to simply declare "dividends."

Even though they are non-taxable distributions for purposes of federal income tax, they are still dividends nonetheless. There is confusion -- some tax-oriented perspectives do not think of them as "dividends" because they are nontaxable, but they are, in fact dividends as far as the corporation is concerned.

In your case, the corporation can calculate their earnings sometime in January, and declare dividends "payable to the shareholders of record on December 31." That is how dividends are commonly done even in large corporations.

By the way, if this happened in my neck of the woods, the new 30% shareholders who paid good money for their shares would really be P O'd that the sellers drained out all the cash to pay themselves.

And by the way, Go Steelers!! from way down south in Dixie...

[BOB W]

Can I assume that the new shareholder is paying "nothing" for the 30% ownership in the corporation and that is why the distributions from AAA are needed?