Tax
Owner Distribution
Cash or property transferred from a passthrough business (LLC, S-corp, partnership) to its owners against their equity capital, not as wages or compensation for services.
Owner distributions are the mechanism by which a passthrough entity's owners actually receive cash. In an S-corp, distributions come after reasonable W-2 compensation is paid; in an LLC or partnership, they can be the sole way owners receive cash. Distributions reduce the owner's capital account (or S-corp AAA / basis) and are not deductible to the business, since the income was already taxed to the owner on the K-1 or Schedule E.
The three critical rules: (1) an S-corp owner-employee must take reasonable compensation as W-2 wages before or alongside distributions — distribution-only draws are the classic IRS-audit trigger; (2) distributions must generally match ownership percentages (S-corps require it strictly; multi-member LLCs can waive it with a written operating agreement that meets §704(b) substantial economic effect); (3) a distribution in excess of basis is taxed as capital gain, so tracking basis matters.
Distributions are not the same as guaranteed payments (partnership only, treated as compensation) or dividends (C-corp only, taxable at the shareholder level in addition to the corporate tax). Getting the label right on the books matters at tax time.
Common pitfalls
- Taking S-corp distributions without any W-2 wages; the IRS reclassifies the distributions as wages and assesses back payroll tax plus penalties
- Distributing unequally in a multi-member LLC without an operating agreement provision that survives §704(b) scrutiny
- Distributing in excess of basis and not recognizing the resulting capital gain on the owner's personal return
- Booking distributions to a P&L account (they belong in equity), which inflates expenses and distorts every ratio a lender will look at
Related service
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Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.