S Corp "Silent" Partner
I am 33% owner in LLC. I have two partners, each owning 33%. I and Partner One are active contributors to the company. We each draw a $100K salary. The third partner was an early financial investor but has become more or less "silent." We are considering moving to an S Corp structure for various reasons, but our situation with 3rd partner complicates matters.
My question: With an S Corp, our net income must be distributed according to our respective ownership positions. We have no doubt that our salaries of 100K will be considered "reasonable" by IRS, but our third partner receives no salary, since he is not actively engaged in operations. If we move to S Corp, will we draw a red flag with IRS if the third partner receives a distribution but does not receive any salary? Can an S Corp take a "silent partner" into consideration without fear of audit? Or do we have to move our 3rd partner into a "reasonable salary" structure in order to pay distribution to him?