How must profits be distributed in S corporations?

In S corporations, profits must be distributed in proportion to ownership, which aligns with the structure and regulations governing S corporations. This means that each shareholder receives a share of the profits that is directly related to their percentage of ownership in the company.

This proportional distribution is crucial because one of the defining characteristics of an S corporation is that it treats shareholders equitably in terms of income allocation. Under IRS rules, any distribution of earnings must reflect the percentage of stock held by each shareholder to ensure compliance with tax regulations and to maintain the S corporation's status. Thus, the profits are not distributed equally regardless of shares held, nor can they be distributed based on arbitrary criteria such as company needs or as dividends, which are specific to other types of corporations.

This method of distribution helps to maintain transparency and fairness among shareholders, ensuring that each individual benefits from the company’s profits according to their investment.