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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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What do I do if the other shareholders in a S corporation

Customer Question

What do I do if the other shareholders in a S corporation are giving themselves distributions without the consent of all shareholders?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

That might be an issue with tax liability...
The law required that S-corporation has ONLY one class of shares.
If some shareholders receive different distribution - that may be classified as having several classes of shares - and S-corporation will be re-classified as C-corporation.
As a result - the IRS will calculate corporate income tax due - and distributions will be taxable to shareholders as dividends - so there will be double taxation - on corporate and shareholder levels.

Unfortunately - neither IRS nor other government authorities may enforce or prevent corporate distribution. That is strictly between shareholders and based on their agreement.

If you would not be able to negotiate between shareholders - the only option to sue another shareholder for damages - that would be a civil matter between shareholders.

Sorry for your situation.

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