S-Corp partnership startup. How to pay owners with minimal profit?

Does an S Corp have to distribute profits?

For that reason, the S corp. must distribute all pre-tax profits to the shareholders for tax purposes.” An S corp. then, must allocate the profits of the business to the shareholders for tax purposes.

How do partners get paid?

Like sole proprietors, partners don’t get paid via a regular salary but rather earn distributions of the business profits. These dividends are generally set out in the partnership agreement (if they aren’t, you may want to think about drawing up a partnership agreement that outlines distributive shares).

How do corporations distribute profits to their owners?

Profits may be distributed to shareholders in the form of dividends, or they may be reinvested or retained (within limits) by the corporation. Losses by the corporation are not claimed by individual shareholders.

What if my S corp makes no money?

The IRS will not object to the S- Corp making zero payments to the owner employee when the business is earning little or no income. But, when the business is making money, it must first pay the owner-employee a reasonable compensation before making any payroll tax-free distributions with any excess funds.

How do I pay my S corp distribution?

S Corporation Distribution Rules

When you pay out distributions, you must pay them to owners/corporate officers based on their ownership in the business. This ownership could be set by the operating agreement, or by the issuance or purchase of shares in the business.

Do all S Corp owners need to take a salary?

The IRS requires that all S corp owners, also known as shareholders, who are actively involved in running the business receive a W-2 salary. As the business owner, you are still entitled to draw money from the business in the form of a shareholder distribution.

What is the most tax efficient way to pay yourself?

Perhaps the best way to pay yourself for these three business structures is through the owner’s draw, distributing funds as needed throughout the year as your business grows. Owner’s draws are funds transfers, not personal income or wages, which means they’re not taxed as such.