A shareholder distribution is a way to take funds out of your business without incurring additional taxes. There are some restrictions, so please continue reading below, but a shareholder distribution is achieved by simply transferring funds from your business checking account to your personal bank account.
Shareholder Distributions vs. Wages
Shareholder distributions are different than wages. While wages are processed via the payroll system (Gusto), shareholder distributions are simple transfers of money from your business checking account to your personal account. As a shareholder-employee of an LLC taxed as an s-corp, you are required to pay yourself a reasonable wage, which is something you should prioritize before taking any shareholder distributions.
When to Take a Shareholder Distribution
Before taking a shareholder distribution, prioritize the following:
1) Confirm that you already submitted payroll (Gusto) for the current month.
2) Confirm that you already transferred funds for the accountable plan expenses for the prior month.
3) Confirm that your distribution will not cause your business checking account to dip below your reasonable minimum business checking balance. To determine an appropriate minimum business checking balance for your company, a good rule of thumb is to calculate your average monthly revenue (i.e. payments received from customers) and multiply by two. For many of our members, a good balance to aim for is $10,000 - 20,000 depending on the monthly salary amount.
As long as you have completed/prioritized the items above, you can take shareholder distributions whenever desired, as often as you want.
How to Take a Shareholder Distribution
Simply transfer funds from your business checking account to your personal checking account. You can use any method you would like for transferring the funds (except for Gusto, which should only be used for monthly payroll). When you go to initiate the transfer, your bank may include a memo option. If possible, use the memo to indicate that the transfer is a shareholder distribution. In some cases, this memo will be included as part of the bank detail that is passed through to the accounting system.
The reason that Collective recommends that you keep at least one to two months worth of revenue in your business checking account at all times is to avoid accidentally incurring additional tax liabilities that occur when shareholder basis dips below zero. Negative shareholder basis is less likely to occur when you adhere to a reasonable minimum business checking balance. For more information on shareholder basis, click here.
Why Are My Shareholder Distributions More Than What I Transferred To Myself?
It is important to understand that, from an accounting perspective, a shareholder distribution may be created when a customer payment is received in a personal account as opposed to a business account.
If you notice that the total shareholder distributions shown on your balance sheet seems higher than expected, consider whether you received any customers payments in a personal account after your s-corp books start date (if you are unsure of your s-corp books start date, you can request this information by emailing [email protected]).
For example, when building your books, your onboarding accountant may have worked with you to include business activity from a personal account - by either uploading a spreadsheet or temporarily connecting your personal account to the accounting software. In these cases, your onboarding accountant eventually closed out the temporary personal accounts used during the book rebuild, and as a result, a shareholder distribution (or contribution) was created on the balance sheet of the LLC.
Shareholder distributions are also increased when you accidentally make a personal purchase on a business account.