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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 586
Experience:  10 years experience
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I have a service business and a partner its a S corp I own

Customer Question

I have a service business and a partner its a S corp I own 50% and my partner owns 50%
we earned 1,000,000 over the last 5 yrs.
Me (Joe) partner A earned 700,000 prophet and my partner earner 300,000 . so it safe to say that that my partner has not earned my a dollar
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
That would be correct - if you run two separate businesses.But as there is ONE S-corporation - all income is earned by that S-corporation - not by each shareholder.As an employee of S-corporation - each of you will be paid wages for services provided to the S-corporation - that what you all agreed.However - any income realized by S-corporation is passed to shareholder according to their shares - in your case - that is %0% to each. If you pass profit in different proportion - that will be classified as having two different classes of shares - and will disqualify S-corporation status.We need to be very careful here - because in this case - the corporation woudl be taxed as C-corporation - and will be required to pay corporate income tax on its business profit.
Customer: replied 2 years ago.
How or what should I offer this partner to get him out or what should I ask for my 50% of the co.
Expert:  Lev replied 2 years ago.
Hi,there might be several options.First of all - you might not need that S-corporation. In this case - you will file a final tax return and dissolve S-corporation. All liquidating distributions must be according to percentage of the ownership - in this case - 50-50 between two shareholders.Another option - you might want to buy your partner out - so you will purchase 50% shares owned by your partner. There is no specific regulation to set that purchase price - it might be agreed between the seller and the buyer. However - the seller - will report the sale transaction on his/her tax return - and depending on the basis the seller might realize the capital gain.Similarly - your partner might purchase your shares - and in this situation - you will report the sale transaction and could realize the taxable gain.