Friday, February 28, 2014

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
      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.