Thomas Healy wrote
- quote -

You are buying into an existing corporation and you don't
know what the current book value is? It could be that you
are buying a pig in a poke, as they used to say. As Thomas
Healy says, you need to have someone explain S-corp
taxataion. But, at least as important, you need an
accountant to look at the corporation's financial to see if
there is really any substnace or if it just a shell. Worse
yet, it could have undisclosed liabilities you should know
about.

What I'm saying is that it appears you are going into this
business rather blindly. Never a good idea.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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"cuzickc[at]hotmail.com" <cuzickc[at]hotmail.com> wrote:

- quote -

Do yourself a favor. Hire a professional help represent you.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"cuzickc[at]hotmail.com" <cuzickc[at]hotmail.com> wrote:

- quote -

First, I hope you have built in some protection for
unexpected (i.e., undisclosed) liabilities that you could be
taking over half of. One way to do that would be to create a
new S corporation. Immediately after the purchase, you and
the original owner contribute your shares of OldCo to NewCo,
with OldCo then being a wholly owned Qualified S Corporation
Subsidiary of NewCo. Operationally the companies operate as
though you didn't do this, but any legal problems in OldCo
can be isolated from your investment.

I'm not sure what you mean about the 5% membership in your
LLC. An LLC cannot own shares of an S corporation without
terminating the election, though the S corporation can own
an interest in an LLC.

You have no need to know what the current owner paid for the
company x years ago: it's not relevant to the value today.
Also, book value is not relevant, though inside tax basis of
the assets would have a bearing on your taxable income from
the corporation. Likewise how he would treat the sale on his
tax return doesn't matter to you.

It's generally a good idea to pay only part now and part
later, in case you do discover problems. Your initial basis
in the stock would be $185,000 (50% to each of you). How
this would play out over the years depends on the success of
the business.

I would strongly suggest you retain a local tax pro to
explain the intricacies of S corporation taxation if you
aren't familiar with it. What happens also depends on
whether you will be active in the business, or merely
treating it as an investment.

--
Tom Healy, CPA
Boulder, CO
Web: http://www.tomhealycpa.com

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My partner and I are buying into 50% of an existing
S-corp(which currently has only one owner) and have a
question about how to structure the best tax advantageous
deal. The proposal

1.) $65,000 Cash to paid to up front
2.) $1,200/month interest for a loan from the existing
owner on $120,000
3.) 5% membership in our outside LLC
4.) An option for us to buy out his existing shares in
36 months for $120,000.

I know that he originally bought the business for $110,000,
but am not sure of the book value today.

My tax question:

1.) I am assuming that the $185,000 ($65,000+$120,000 loan)
would be a stock transaction possibly with an outside
agreement to pay the interest, so he would have a captial
gain on the transaction. Is this correct?

2.) no idea about how to address the 5% membership in the
LLC.

Any help?

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