In theory, if a small business attracts shareholders (let's say your uncle invests 10%), then those shareholders would get their share of income, from which they would pay tax as if it was capital gain. Theoretical saving would be from not having to pay social security and medicare taxes.
The assumption is that shareholder does not work and is just an investor.
However if there is one or two shareholders, then IRS requires that shareholders pay themselves a reasonable wage. If such a wage is not paid, then, IRS has a right to impose additional taxes and penalties.
It is important to understand that this type of law is for the people who are at a top bracket in their profession or business. Simply put, very rarely there are salaries that would pay above $500K per year. The rest of it comes from the skillful use of capital, political connections, or benefiting from good organization of labour.
I'm not a corporate tax lawyer but I believe S-corp distributions count as any other distributions and are not at all tax-free: They're merely taxed at a lower rate. Reduction of basis merely applies to paid-in capital which you've already paid taxes on.
All of this is standard practice and you don't need an S-corp specifically for it.
Actual article describes the area pretty well.
In theory, if a small business attracts shareholders (let's say your uncle invests 10%), then those shareholders would get their share of income, from which they would pay tax as if it was capital gain. Theoretical saving would be from not having to pay social security and medicare taxes.
The assumption is that shareholder does not work and is just an investor.
However if there is one or two shareholders, then IRS requires that shareholders pay themselves a reasonable wage. If such a wage is not paid, then, IRS has a right to impose additional taxes and penalties.
It is important to understand that this type of law is for the people who are at a top bracket in their profession or business. Simply put, very rarely there are salaries that would pay above $500K per year. The rest of it comes from the skillful use of capital, political connections, or benefiting from good organization of labour.
I'm not a corporate tax lawyer but I believe S-corp distributions count as any other distributions and are not at all tax-free: They're merely taxed at a lower rate. Reduction of basis merely applies to paid-in capital which you've already paid taxes on.
All of this is standard practice and you don't need an S-corp specifically for it.
Return of the capital is always free. Your comment is correct