Are sub-S corporations required to distribute all net income to stockholders or canit reinvest it to finance growth?

UPDATED: Mar 5, 2012

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Are sub-S corporations required to distribute all net income to stockholders or canit reinvest it to finance growth?

We have a subchapter-S corporation. Each year we distribute enough of our net income to cover stockholder’s taxes at the maximum taxable rate. The rest is reinvested in the business to finance the company’s growth. One minority stockholder (19%) is complaining that we do not distribute all our net income. He believes that what we are doing is some how “fraudulent”. Is he crazy or correct?

Asked on March 5, 2012 under Business Law, Ohio


Ronald Cappuccio / Ronald J. Cappuccio, J.D., LL.M.(Tax)

Answered 11 years ago | Contributor

S corporations are not required to make any distributions. For tax purposes, the income passes through to the shareholders even if they do not get a distribution. You are wisely distributing enough income to assure the shareholders can pay the taxes without having pure "phantom income."

Do you have a buy/sell agreement? Is there a way you can buy the disgruntled shareholder's shares. You should definitely talk to an experienced tax and business attorney.

I hope this helps!

Ron Cappuccio

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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