Discussion:Buyout of C-Corp Shareholder
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Discussion Forum Index --> Advanced Tax Questions --> Buyout of C-Corp Shareholder
Discussion Forum Index --> Tax Questions --> Buyout of C-Corp Shareholder
| 6 March 2008 | |
| Hello All,
I have a 2 shareholder C-Corp client, where the 34% shareholder is looking to get bought out. The buyout amount is approx $3.4 million. Also, on a side note - the C-Corp may be involved in an ESOP in the future. I am looking for opinions on which is better to see if I am missing anything - is it more beneficial to have the corporation buy back the stock as Treasury stock or for the corporation to pay the remaining shareholder an increased salary and have him buy it back personally. I have my thoughts straight, but I guess I want to make sure that I am not missing anything important. Any opinions would be GREATLY appreciated! | |
| 6 March 2008 | |
| sorry . . . more beneficial to the remaining shareholder (ie in the event of a sale of the business in the future, or possible ESOP etc.) | |
| 6 March 2008 | |
| I'm sure there a lots of details missing on a $3.4 million deal but here goes. Why would you pay a $3.5 million+ salary and skew operating results in order for the remaining shareholder to buy the stock? Isn't a straight up redemption a whole lot simpler and less costly? | |
| March 6, 2008 | |
| Usually cross purchase is preferable for the basis increase. But for that kind of dough, I agree with RKR. | |
| 6 March 2008 | |
| Well, my thinking was that the buyout will be over x number of years, so as the corporation is paying back the liability to the selling shareholder, they will be paying taxes on a C-corp profit and the remaining shareholder is getting no benefit.
The corp may be paying a higher salary to the remaining shareholder, but they will not be creating a profit. What am I missing?? | |
| March 6, 2008 | |
| Can the added salary be sustained in reasonable comp numbers? i.e. without kicking up dividend and double tax? | |
DeacDiggler (talk|edits) said: | 6 March 2008 |
| your exiting shareholder will undoubtedly want more cash that way, as he will have to pay ordinary rates on that salary. Also, how do you propose to get the stock from him to the other owner without a buyout at an arms length amount?
Too bad they're not an S corp. | |
| 6 March 2008 | |
| I am sorry but maybe I am not explaining it right - the increased salary would be to the REMAINING shareholder over x number of year to enable him to purchase the stock of the exiting shareholder instead of paying the exiting shareholder directly for the stock (treasury stock) | |
| 7 March 2008 | |
| This would be easier if you gave some more details. Does the Company have cash to spend? How long is the exiting shareholder willing to wait for his money? Will future profits cover the cash flow requirements? Can the Company borrow? | |
| 7 March 2008 | |
| starting to sound like a homework question, isn't it? Especially with no profile. | |
| 7 March 2008 | |
| Kevin,
His question pattern doesn't suggest homework. Seems legit. But W&K, please fill out your profile. I think we need to start boycotting questions like this with no profile especially with the kind of numbers this guy is kicking around. Tom | |
| 7 March 2008 | |
| Hello all,
I am sorry that my profile was not filled out - we are new to this website and have not had the time to complete the profile. I took the time out tonight to fill it out. Anyway, my question is legit and this is one of our larger clients. Basically, the exiting shareholder is not accepting the terms of an ESOP buyout which has been in negotiations for 2 years now. He is now being terminated by the remaining shareholder as it states in their shareholder agreement. (The remaining shareholder owns 66%) The client and I were kicking around the options to try and determine what was better - a buyout by the corp or a buyout personally. However, the remaining shareholder does not have the funds to buyout so that is why were discussing increasing his salary and buying the stock personally. Upon termination, there will be available funds of $300K per year (the exiting shareholders old salary) which will be used by the corporation for the buyout as treasury stock or the remaining shareholder can take that salary personally and use the funds to buy the stock personally. The treasury stock option will cause the corp to have a large profit as they pay out the shareholder. | |
RoyDaleOne (talk|edits) said: | 7 March 2008 |
| What difference does it make who has the "large profit"? I would think that the Corporation buying the stock would be better.
1. No personally liability by the remaining shareholder, and the income could go bye,bye. 2. I would think (however, in my State we have no personal income tax) that the income and payroll taxes would also favor the Corporation buying the stock. 3. I can think of no good reason for the remaining shareholder to buy the stock personally. 4. Financial Statements presentation, banking relationship, debt to equity ratios, etc. could come in to play. Therefore, W&K knows the answer. | |
| 7 March 2008 | |
| Thanks W&K for taking the time to fill out your profile. I realized your question was legit after looking at some of your earlier posts. We get a lot of homework questions here from students, hence Kevin's response. It's not personal. We get a lot of DIY'ers as well who are not tax pros who want us to help them with their personal returns when they do their returns on TurboTax, TaxCut, etc. We try to ask the pros to fill in their profiles so we know who we are talking with, level of experience, etc. There are a couple of exceptions, but they are few and far between.
Welcome and we look forward to seeing you around the board. Tom | |
DeacDiggler (talk|edits) said: | 7 March 2008 |
| why not
a) redeem him for a note, b) elect S status to avoid C corp tax on newly increased income If you go with the increased salary idea, be prepared for the reasonable comp question. | |
