Can an S-Corporation Make a Capital Call to Its Shareholders?

Business meeting
••• Jupiterimages/Pixland/Getty Images

With a capital call, a small business requires the owners -- shareholders of an S Corporation -- to contribute more money to the company. While a capital call provision is more common with partnerships or LLCs, it is also possible for a company set up as an S corporation to use this action to obtain additional funds from the share owners.

S Corporation Structure

While an S corporation is a pass-through entity like a partnership or LLC, the S corp must also function under the rules and regulations that apply to corporations. The owners of an S corporation are shareholders of the company and have voting rights based on the proportional ownership of shares. When it comes to capital calls, a company set up as an S corporation does not have the flexibility of a partnership or LLC, which typically function as partnerships.

Capital Call Provision

To be able to make a capital call to owners, the incorporation or operating agreement that defines how the S corporation runs must include a capital call provision. The election of S corporation status does not give a company the broad right to require share owners to give more money to the company. If the corporate ownership document includes the provision, it will state how and under which circumstances a capital call can be issued.

Owners Refuse to Pay

A capital call provision allows a business to make a capital call, but it does not force the owners to write a check for the requested money. If an owner does not comply with a capital call, that owner's stake in the company would be adjusted. For an S corporation, if one owner does not pay the capital call amount, the money must come from the rest of the owners. As a result, the ownership share of the non-compliant shareholder will be reduced, and the reduction amount will be redistributed to the owners who met the capital call.

Money-Raising Alternatives

A capital call to the owners of an S corporation could be viewed as a drastic move, and the owners may balk if they believe the company is in trouble -- which it might be if it does not get more capital. One alternative way to raise money is for the founding or major shareholders to sell some of their shares to the smaller investors and then direct that money into the company. Another option is to ask for loans from the share owners. In this case, participation of every owner is not required, and the plan includes a promise that the loans would be repaid when the company moves into better financial shape.

Related Articles