Ownership change in an S Corp

Steps to Buy Out a Partner in a 50/50 S Corp

 

S corporations typically represent a closely held business owned by a few individuals. This business type is similar to a partnership, but offers different benefits for the owners. A common issue is how to buy out a partner who wants to leave the company. S corporations can have shares of ownership stock, but the company doesn't usually sell them on the open market. During the buyout process, you can ensure an amicable process where each owner receives a fair share of the company's asset value.

       

1. • 1
     Review the S corporation agreement. Like most businesses, an S corporation will have specific guidelines detailed in the starting business agreement. If no provision exists for the buyout process, the company should handle the process according to common business standards.
   • 2
     Obtain a third-party valuation of the company. This valuation provides both owners with a firm idea of the company's economic value. 
   • 3
     Apply the business's total value to each share in the company. For example, if a company's total value is $1.2 million and each partner has 100 shares, each share is worth $6,000. Therefore, the buyout amount for the partner is $600,000.
   • 4
     Set a schedule for paying off the partner. Partners may be willing to accept a scheduled buyout rather than a single one-time payment. This can help the company avoid a large decrease in capital at one time.

Gift Tax

Gift tax

Although there’s no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax.
Most people don’t have to worry about this tax because it generally doesn’t apply until you make gifts exceeding the annual exclusion amount to one person within a single year. And there are other exclusions that often prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there’s an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.

The annual exclusion

The annual exclusion is adjusted for inflation and applies to each person every year. The amount is $14,000 as of 2014.

Example: On December 31 you give $14,000 to your son and $14,000 to your son’s wife. On January 1 (the next day) you give another $14,000 to your son and another $14,000 to your son’s wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.

If you’re married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.

Giving more than the annual exclusion amount

If you give more than the annual exclusion amount to one person in a single year you’ll have to file a gift tax return. But you still won’t have to pay gift tax unless you gave a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2014 the amount is $5,340,000.
You don’t use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount described earlier. For example, if you make a $15,000 gift in 2014, you have used up only $1,000 of your lifetime limit.
Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is also $5,340,000 as of 2014. This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax. So you shouldn’t ignore your lifetime limit even if you feel certain that your lifetime gifts will never add up to that amount. It pays to plan your gifts around the annual exclusion amount and the exclusions