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Drawing from Retained Earnings of an S Corp

I just completed my first year in business and want to ensure I am handling my retainted earnings account correctly.  I am the sole shareholder of an S Corp and want to know if I should leave my distributions in my Retained Earnings account or transfer them into a Owner equity account and draw from there.  Since I am pass thru corporation the retained earnings which remained after I paid myself a salary is my distribution (not a dividend).  

 

I am currently leaving the money in my business checking and drawing as needed debiting the retained earnings account.

 

For bookkeeping purposes, is it best to just leave it in Retained Earnings or Zero out the retained earnings and deposit it into an Owner equity account and use a Draw account to subtract from my equity?

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Best answer 02-02-2018

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Established Community Backer ***

Re: Drawing from Retained Earnings of an S Corp

In an s-corp there are no owner equity accounts, you have shareholder capital and additional shareholder paid-in capital accounts.

Those capital accounts can not be used the same way equity accounts are used in a sole proprietor or partnership.  In a corporation, as a working shareholder you are required to be on payroll - are you?

A corporation, even with a sole shareholder is required to have a written shareholder meeting at least annually (some states make that more often) in that meeting you vote on whether or not to issue dividends or distributions to the shareholders.  Dividends and distributions are handled differently for tax purposes, and shareholder capital.

Retained earnings is what is used to "pay" dividends and distributions, the remainder stays in the corp.

I think you need to sit down with a tax accountant and verify or get things correct

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Established Community Backer ***

Re: Drawing from Retained Earnings of an S Corp

In an s-corp there are no owner equity accounts, you have shareholder capital and additional shareholder paid-in capital accounts.

Those capital accounts can not be used the same way equity accounts are used in a sole proprietor or partnership.  In a corporation, as a working shareholder you are required to be on payroll - are you?

A corporation, even with a sole shareholder is required to have a written shareholder meeting at least annually (some states make that more often) in that meeting you vote on whether or not to issue dividends or distributions to the shareholders.  Dividends and distributions are handled differently for tax purposes, and shareholder capital.

Retained earnings is what is used to "pay" dividends and distributions, the remainder stays in the corp.

I think you need to sit down with a tax accountant and verify or get things correct

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Re: Drawing from Retained Earnings of an S Corp

Yes, I already pay myself a "reasonalble" salary and yes have had the required annual meetings.  The retained earnings (profits) will be pass through taxable income on my personal taxes for last year and therefore cabable of being distributed out to the shareholders (just me). I could just write myself a check and zero out the RE account, but if I choose to leave it in there.  Profit distributions are untaxed because I already will have paid taxes on it in my 2017 return.

 

My question is more of a bookkeeping one.   Leave the profits in the company (as retained earnings) and draw it out as needed or distribute profits  (according to bylaws) which in quickbooks I can do by putting it into an owner equity account or writing myself a check.

 

My accountant is aware I want to take the profit though I may not pull it all out.  

Senior Explorer ***

Re: Drawing from Retained Earnings of an S Corp

@tj1701

 

I understand what you are saying.  You can do it either way, but I have a seperate equity account to make it a little more straight foward for my accountant and easy for me to show the owners what they have taken at any point throughout the year.  We are a C Corp and I labled mine S/H Distribution with sub accounts for each owner. (We are a C Corp)

Senior Explorer ***

Re: Drawing from Retained Earnings of an S Corp

To clairify - I do not move the funds all at once.  When I cut a check to the owners I expense it to the S/H Distribution and then once a quarter I create a JE to capture the funds from the Retained Earnings.

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Re: Drawing from Retained Earnings of an S Corp

Thank You.

Super Contributor **

Re: Drawing from Retained Earnings of an S Corp

Only one thing I would point out here:  you can't take more distributions from an S-corp than you have available in basis.  Make sure you are tracking your basis.  Ask your CPA if he is tracking basis.  Forgetting this can cause catastrophic problems.

For example, you can't go get a $100k loan for the business, and then take a $100k distribution.    S-corp shareholders do not gain basis through debt, even if the debt is personally guaranteed.  So without basis, that distribution would be reclassified and the rest is a path you want to avoid.

Mark Wagner CPA

Established Community Backer ***

Re: Drawing from Retained Earnings of an S Corp

Agree you can leave the RE in the company or move to personal bank account once is taxed.  I would decide based on where you are earning the most interest.  Also agree keep in RE account or new one, either way is fine if you want to see it as a separate line on statements.  CPA will track the change in account, I usually do mine like this:

 

CR 3100 SH Investment - Money I put into company

DR 3200 SH Distribution - Money I took out of company

CR 3300 Retained Earnings -  Money I earned in company

 

Also agree tax person s/b tracking your Basis, which may differ slightly from above, but DR Debit must not exceed Credit balances.  

 

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Re: Drawing from Retained Earnings of an S Corp

So do additional shareholder investments or distributions fall into the label "additional shareholder paid in capital?

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Re: Drawing from Retained Earnings of an S Corp

Can you invest the RE in stocks or CD's and keep them inside the S corp building up that amount through the years?

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Re: Drawing from Retained Earnings of an S Corp

You CAN take out more than your basis as a distribution.  It just becomes taxable at that point.  It is not subject to SE taxes though, only income tax.  It’s one of the tax-planning strategies associated with s-corps.  My advice would be to make sure one consults with a tax specialist who knows about s-corps.

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