Buying out a 50/50 S Corp Partner

Legal Article

Buying out a 50/50 S Corp Partner

A C corporation can choose to be taxed as an S corporation if the company meets the requirements specified in the Subchapter S of the Internal Revenue Service (IRS). Furthermore, a company must make this decision with the IRS and they must meet each requirement that the IRS has for these types of corporations. To become an S corporation, a company must fill out and file form 2553 with the IRS.

S corporations can be extremely useful for small companies that are looking to save money on taxes. However, if one party wants to sell their share of the business, the other partner can buy out the 50/50 S corp partner. If the business only has two members, however, the sale can become difficult if these members each hold 50 percent of the company. One reason for this is that both members may not agree on the company’s value and thus, a third-party moderator may be necessary. A 50/50 S corp buyout agreement can be complex, however, if the partners place a buyout provision in the original contract, the sale can be quick and easy.

Below is a set of steps you can take to quickly and easily execute the sale of shares in a 50/50 S corporation.

Review S Corp Contract

When selling half of an S corporation shares, the first thing each party should do is to review the original S corporation contract. The reason for this is that the contract may already have a buyout agreement provision. Additionally, if the buyout agreement is in the original contract, it will likely explain the process for initiating the buyout, valuing the shares, and settling payment terms.

Determine Partner’s Basis

Partners of an S corp may loan personal equipment or money to the company in times of need. Thus, if you or your partner have done this and not been paid back, you must calculate your partner’s debt to the company as it would lower their buyout value. Additionally, a partner may loan money to the company through an indirect loan. You must include these loans as well as they would also lower the value of the buyout. However, if your partner was the one to loan assets to the company, their buyout payment would be higher.

Execute Sale Documents

After determining the value of your company, the next step to take is to create—or hire someone else to create—the buyout agreement. Furthermore, once you complete the transaction, you should record this information on the company’s stock ledger. Finally, if applicable, the seller must transfer any paper stock certificates that they have.

Decide on Buyout Structure

In certain cases, the buyout may be due at the time of sale or in increments over a few months. The seller may want to receive the payment in full. However, the company may not have the cash flow to make this payment without seriously hurting the company. One popular way to receive fast payment is to create a tiered payment provision. This provision states that the seller will receive a portion of company profits until the buyout agreement is fully paid. Thus, if the company does well, the buyer receives money quicker. At the same time, if the company suffers financial hardships, the buyout agreement will not completely cripple the company.

Stock Redemption Buyouts

Instead of offering to purchase the shares with money, the partner may want company property. If the property transfer has appreciated in value, since its purchase, the transfer will create a capital gain. The remaining partner must report this capital gain.

Contact Our DC Law Office for More Information

Finally, for more on buying out a 50/50 S corp partner, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding business and tax law, check out our blog.