Question

Anna is the sole proprietor of a successful small business and she is looking to expand. Anna also holds stock in "x" corporation and could take a distribution from the corporation in order to fund the expansion of her small business.

Compare and contrast the distribution of assets from a corporation to a shareholder to the distribution of assets to a sole proprietor and give Anna advice as to why this may or may not be the best option for her to expand her small business.

Answer 1

Answer -

Distribution of assets from a corporation to its shareholder is prejudicial to the interest of the corporation and is violating the provisions of the Law. As this would involve the characteristics of a related party transaction on which there are certain restrictions imposed. As per the Law, a corporation is a separate legal entity and shareholders are owners of the same who contributed in the form of equity.

Whereas, the distribution of assets to a sole proprietor is valid as the business and sole proprietor are one and the same. There are no two separate entities so as to constitute a violation in Law.

In view of the above discussion, it is not advisable for Anna to take a distribution from the corporation for funding the expansion of her own business whether small or not.