They don't distribute from the profit of the company like, say, Adobe, or Amazon do. But technically what a shareholder takes out of the corporation, other than payroll or reimbursements for expenses, is a distribution. It is distributed to them.

You are correct, though in that the basis does not show on the corporate K-1. My bad...they show on partnership K-1's. But you would still track the basis of the shareholder.

The 3% shareholder may well be a shareholder and not a lender. A lender would not get a percentage of the profit, nor would they get distributions. There would be a liability for the loan and then the corresponding expense for the interest. (Principal would reduce the liability). They could have "lent" the money to the majority holder for a piece of the pie. But, once they get that piece, they are now a minority shareholder for this question.