Buying out partner in S-Corp

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unclescrooge
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Buying out partner in S-Corp

Post by unclescrooge »

I'm buying out my partner in my S-Corp.

We are currently 50-50 owners. We started it several years ago with minimal capital investment.

Part of the payout includes cash on the books.

Is it possible to have the company but back his share?

How does the taxation work? I'd like to avoid paying out of my personal funds because I'm in a high tax bracket. I.e. if like to pay with pre-tax money vs post-tax money. Is that possible?
SubPar
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Re: Buying out partner in S-Corp

Post by SubPar »

You're solidly in lawyer & CPA territory.

Multiple ways to handle this and tax implications can vary depending on how sale is structured (asset vs. equity, financing arrangement, valuation, etc.). Slightly confused by your tax bracket/pre-tax money comment...can you clarify that? Are you saying you want to pay with pre-tax money of the business or your personal pre-tax retirement savings?
bsteiner
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Re: Buying out partner in S-Corp

Post by bsteiner »

The S corporation would have to use after-tax money, though since it's an S corporation you would be paying the tax.

For example, suppose the purchase price is 100 and you're in a 30% combined Federal and state bracket. You buy him/her out for 100. The corporation earns 142, which it distributes to you. You pay 42 of tax and use the remaining 100 to pay the purchase price.

Alternatively, the corporation buys him/her out for 100. The corporation earns 142. It distributes 42 to you which you use to pay the tax, and it pays 100 to the selling shareholder.

In either case, there are some tax elections as to which your lawyer should advise.

Why did you set this up as an S corporation? If you had set it up as an LLC taxable as a partnership, you could have adjusted (stepped-up) the basis of the entity's assets (essentially as if you or the entity bought 50% of the assets) and depreciated the increase.
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unclescrooge
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Re: Buying out partner in S-Corp

Post by unclescrooge »

S Corp election was made a decade ago, can't recall why. I'm in California, if that makes a difference.

I was wondering if it would be beneficial for the business to pay him out over 6 months from monthly income.

Let's say S Corp collects $142k in revenue, pays partner out $100k and remainder paid to me. Seems like this would result in less taxes than if it paid me $142k and then I paid the partner $100k.

Just trying to understand if this is true, and what it would entail.

I'm trying to set up a meeting with my CPA but he's hard to get ahold of.
NYCaviator
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Re: Buying out partner in S-Corp

Post by NYCaviator »

unclescrooge wrote: Thu Jun 23, 2022 1:43 am S Corp election was made a decade ago, can't recall why. I'm in California, if that makes a difference.

I was wondering if it would be beneficial for the business to pay him out over 6 months from monthly income.

Let's say S Corp collects $142k in revenue, pays partner out $100k and remainder paid to me. Seems like this would result in less taxes than if it paid me $142k and then I paid the partner $100k.

Just trying to understand if this is true, and what it would entail.

I'm trying to set up a meeting with my CPA but he's hard to get ahold of.
This is a very complicated and fact specific question for which you need to speak with a CPA and probably a lawyer. The CPA can advise you on the tax implications, but I'd want a lawyer (representing the business) to draft up the paperwork to make sure any buyout goes smoothly and it's done correctly.
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Raybo
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Re: Buying out partner in S-Corp

Post by Raybo »

Money the corporation pays to your partner is not an expense. Thus, if the S corporation makes $142K and you own the entire S corporation, then it passes the entire $142K to you as income.

If this wasn't an S corporation, the profits don't flow through to you and the treatment of the purchase might be different, though profits will get taxed somewhere along the line.

One option might be to convert the corporation to a C corp and then arrange the buy-out. IANAL and I have no idea if this is a good idea or even feasible.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
HootingSloth
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Re: Buying out partner in S-Corp

Post by HootingSloth »

This article has a high level discussion of some of the potential issues. If any of that is not crystal clear to you, a lawyer would be helpful.
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