Yes, they reduce the basis on the Balance Sheet. If the distributions exceed basis, then the amount of excess distributions is taxed as a capital gain. The advantage of taking distributions is they are not taxable income, but rather return of equity.

Yes, it reduces the basis on the K-1.

If an investor owns 3% of the corporation, then yes, they get a K-1 for their 3% of net income from the P&L. Distributions, again, are not taxable unless they exceed that investors basis.