Buying Out Your Corporation Co-owner

You may think of your joint shareholder as a business partner, but an incorporated business is a tax entity that is different from a partnership. This arrangement comes with specific tax consequences if you decide to buy out your corporation co-owner.

First, it’s important to understand that buying the company’s shares of stock from someone does not impact the corporation. Rather, this is an arrangement between you and the other shareholder. You are buying his shares. The number of shares issued by the company doesn’t change.

If the departing shareholder merely takes some money from the corporation, that is not a payment from you for your stock purchase. It’s simply a taxable dividend to the other shareholder. Or, if the business has a tax classification as an S corporation, the departing shareholder is taking a distribution, which is likely not taxable.

The fulfillment of your stock purchase agreement occurs with payment of your personal money to the departing shareholder. If your source for this cash is the company, then you have the tax consequence of receiving a dividend (or distributions, in the case of an S corporation). Again, this process has no tax impact on the company.

The tax consequences of the buyout fall entirely on the individual shareholders. As the buyer, you have a cost for the stock shares you’re acquiring. The selling shareholder has a gain or loss that’s the difference between what you pay him and his cost basis in the shares he’s selling.

If you’re unsure about this money flow, consult with your business accountant, who can guide you through the process.