Legal Question in Business Law in California

Re: Buying Out a Partner in an S-Corp

I'm really bewildered or at this point. You are talking about the evaluation of the Corporation with sophisticated methods of calculations. You do know your you know what from a hole in the ground so why are you dealing with the evaluation. Please, get real and hire a good knowledgeable experienced business attorney who understands business valuations and can hire, yes you will need another person, possibly, a business appraiser in this situation. Those of us to do this kind of work know the basics thinking give you ballpark figures. There are also hundreds of alternatives based upon the fact situation that is given. But you don't give the fact situation and therefore I couldn't advise you in any way, shape and form without knowing all the facts. Get thy body to an attorney, fast.I have been practicing law in this legal area for over 30 years and understand your problem well. I practice in the S.F. Bay Area and if you wish to contact me call at 925-945-6000.

Re: Buying Out a Partner in an S-Corp

One simple method is for the shareholders (owners) of the S-Corp. to enter into a written agreement for one to purchase the other's shares in the company. That agreement can set the value of the company, and spell out all of the particulars of the purchase, including whether the purchasing shareholder will be paying a lump sum, or signing a promissory note providing for periodic payments (weekly, bi-weekly, monthly, semi-annually, or annually). You may also need to notify the California Department of Corporations of the transfer of shares.

Before you enter into this transaction, you should consult with your financial advisors, because there may be tax implications for both shareholders (since taxes are "passed-through" to the shareholders). You should also consult an attorney who can draft the necessary documents. While many people attempt to structure these transactions on their own, in the long run you will probably save time and money by having those who do this type of transaction on a regular basis handle it for you.

Our firm has handled these types of transactions for a number of others. If you would like to set up an appointment, please call (714) 997-9222.

Re: Buying Out a Partner in an S-Corp

First, it is preferable to refer to each other as co-owners rather than "partners" because the latter term implies a partnership rather than a corporation -- with the possibility of misleading others as well as yourselves.

I assume you're asking the question because you face a current need or desire to buy out or be bought out, rather than as an advance-planning matter. It is always better to write a co-founder agreement of some kind covering eventual buy-out or breakup issues. A buy-sell agreement is usually a good idea when forming a closely-held corporation.

Valuing a closely-held business that depends heavily upon the personal services of one or more owners, such as a professional practice (law, architecture, medicine, consulting, etc.) is difficult, and "precision" that will satisfy all owners cannot be expected from an appraisal, especially one done by an owner or anyone other than a trained professional. These appraisers work mainly for divorce and probate attorneys, and are relatively expensive and often slow.

An agreement to have the value set by arbitration might work for you. Find a neutral party you can both trust, then submit the question along with a signed agreement to be bound by the result.

Another device I've seen work in occasional circumstances is a variation on the kids' method for assuring fair division of a piece of pie: "you cut and I'll choose." One party names a price. The other party then says whether he's the buyer or the seller at that price. This assures that the party naming the price does so fairly, because he doesn't know if he'll be required to buy, or required to sell. You can even flip a coin to see which of you will name the price and which will say "I'm buying" or "I'm selling." Put the ground rules in a signed writing BEFORE you try this, and have witnesses.

Re: Buying Out a Partner in an S-Corp

You should discount the value of the receivables to present value and then split accordingly taking into consideration the cost in time, money, labor, etc. in servicing the accounts to remain entitled to the receivables. You may contact me to assist you.