[PaTrOn007]

Hi Guys,
So I passed REG few months ago, and of course I already forgot everything that I learned.
My co-worker just came up to me and asked me a simple question which I couldn’t answer lol. Could you please answer the question below?

Facts: Lets say 2 people form S-Corp. person A contributes $10,000 cash for (80%), while person B does not contribute anything (for 20%)…(is it possible? His Basis is going to be 0?)

Question #1: lets say S corp. makes 100,000 in the current year… Is it correct to say that 80,000$ person A will get; and person B will get $20,000?(even if he didn’t contribute anything?

question 2: Can a Person B withdraw $5,000 from S corp right after the Person A makes a deposit?

Thanksss

[Earla Riopel (NYCARE)]

Hi there,

This is a very interesting question.

First of all we have to remind ourselves, what is an S-Corp?
– It is a corporation that elects not to be taxed as a C-Corp.
– S-Corp. has a legal liability protection of a C-Corp.
– It is treated as partnership as to reporting of income and losses.
– S-Corp. does not pay federal taxes, instead it passes its income, losses, certain deductions & credits to its shareholders.

As to your question:

“Facts: Lets say 2 people form S-Corp. person A contributes $10,000 cash for (80%), while person B does not contribute anything (for 20%)…(is it possible? His Basis is going to be 0?)

Question #1: lets say S corp. makes 100,000 in the current year… Is it correct to say that 80,000$ person A will get; and person B will get $20,000?(even if he didn't contribute anything?

question 2: Can a Person B withdraw $5,000 from S corp right after the Person A makes a deposit?”

My take:

As to question #1, it is always good to go back to the original contract, number of shares each shareholder owned. In your scenario, Shareholder A has 80% and Shareholder B has 20%. The sharing of income and losses aren't based on actual capital contributions, but are based on contract agreement, which in this case, 80%/20%.

Though it wasn't stated on your question, maybe the reason Shareholder B owns 20% because he/she helps in running the S-Corp. with/or without receiving guaranteed payments for services rendered. The 20% share of income ($20k) is his/her compensation or share of S-Corp. income.

As to question #2, again, though it wasn't stated on your question, the $5000 withdrawal could be a loan by shareholder B from the S-Corp. or guaranteed payments for services rendered in running the S-corp.

AUD - 49
BEC - NINJA in Training
FAR - NINJA in Training
REG - 55

Passed: AUD (75%'08/77%'17), REG (76%'09) & BLaw(77%'99); highest on FAR (63%'11/'15) & BEC (63%'11). Credit Hours: USA(PH)-BCom'85(4yr-grandfathered); UBC-(DAP'02/'19); DC-(BBA-Acctg.'22-4th yr)=over 150 hrs credits

[PaTrOn007]

THanks a lot:))

[Author]

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