“If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?”
This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.”
If the business is so unique or the services of the shareholder are so unique, that no one could be hired to replace the owner and there are no other assets in the corporation, then everything taken out of the business should be treated as wages (Reasonable Compensation) and nothing should be considered a distribution.
If the corporation has tangible assets, such as equipment or inventory, the owner deserves a return on that investment. Likewise, if the business has employees or uses contractors, the owner deserves a return on that investment as well.
If the corporation has intangible assets, such as goodwill, a license to operate or a favorable lease, the shareholder should be getting a return on these assets. These assets may or may not have a tax basis. An example of this would be internally developed goodwill.