Surety Bonds 101 – Shareholder Distributions

Shareholder Distribution – Consult Your Surety Bond Agent First!

As 2013 is heading to a close, many contractors are wrapping up their fiscal year end books with their mind on tax liability.  While it is smart and encouraged to have regular tax planning meetings with a CPA, a contractor should also consult with their bond agent with respect to shareholder distributions.  Last thing a contractor needs is a declination on a performance bond request because the distributions were to large to support the program.

Often times a CPA’s advice is to minimize tax liability and depending on the entity of the contractor, it means to drain the company of profits in the form of an shareholder distribution.  This is the opposite of what a surety company will want to see.  While a shareholder distribution may have certain tax advantages, it directly reduces the equity in the company which weakens the balance sheet.  By leaving profits in the company, it’s categorized as retained earnings and strengthens the balance sheet. This can and does have an impact on bonding.

There is no rule of thumb in terms of what percentage of profits to retain or disburse, but leaving all profits in the company would definitely have a POSITIVE impact on a contractors bond program.  But because every contractor has different needs, wants, and desires, it’s best to consult with both a CPA and bond agent when making these decisions.