Frequently Asked Questions

What is meant by “distributions of earnings and profit” in an S Corp?

“Distributions of earnings and profit" in an S Corp refers to the allocation of the corporation's profits to its shareholders. An S Corp, also known as a flow-through entity, allows the profits and losses to flow through the corporation directly to the owners and shareholders. This means that the corporation itself is not taxed, but the owners and shareholders are required to report these profits and losses on their personal tax returns. The amount each owner must report is limited to the amount of capital they have invested in the business. In the accounting system of an S Corp, there are four main equity accounts: Common stock, Additional paid-in capital, Distributions paid to the shareholders, and Retained earnings. The "Distributions paid to the shareholders" account is often referred to as "distributions of earnings and profit" in an S Corp. This is because, technically, an S Corp does not pay dividends as the profits and losses are passed on to the owners.