Can I Take A Distribution?
As a business owner, you may have wondered whether you can take a distribution from your business. Taking a distribution is the way a partner or shareholder receives a distribution of the business’ earnings. This is not the same thing as taking a salary, and a distribution is not taxable. Whether you can take a distribution depends on whether your business is profitable.
As a quick point of clarification, if you have a single-member LLC (your business is incorporated as an LLC, but you are the only member/owner), any money you take out of your business is considered a draw, and is also not taxable. Rather, the business’ net income is reported on Schedule C of your 1040 individual tax return.
For an S corporation or partnership, however, money taken out of the business is considered a distribution. For S corporations, distributions to the shareholders must be based on the percentage of ownership. For partnerships, distributions must be made based on the ownership percentages, unless the partnership agreement states otherwise. Regardless, for both partners and shareholders, distributions are not taxable. The partners and shareholders are instead taxed on their allocated income of the business.
As an example, a business with two partners has $100,000 in taxable income for the year, for which each partner will report $50,000 of income from the partnership on their 1040 individual tax return. The partners decide to each take a $30,000 distribution of the partnership’s earnings. This distribution is not taxed.
It is important to keep in mind that distributions cannot be made in excess of the business’ taxable income. It is also wise to consider cash flow needs when deciding how much of the profits are to be distributed to the partners or shareholders. If you have questions on distributions set up a call with us!