USA Minority Owner Buyout

[DEW]

Hi

The company I work for has 3 owners. One owns 90%, one owns 9% and the third owns 1%. The company is a c-corp. The 9% owner is being bought out by the 90% owner.

I’ve never gone through this before so I want to get the entries right. Can you please help me with this

thank you.

 

[BIG E]

It depends upon how the transaction is structured.

If the 90% owner directly purchases the 9% owner's stock - then there's no accounting entry on the corporation's books. The purchase of the 9% interest is then an increase in the outside basis of the currently 90% owner.
If the 9% owner tenders his shares to the corporation, and then the 90% owner purchases the 9% shares from the corporation, then you need to record an entry for Treasury Stock shares to the corporation upon payment to the 9% owner, then book a separate entry of receipt for the stock issued to the 90% owner, considering FMV of stock as well as Additional Paid in Capital if there is any.

 

[DEW]

Hi. Thank you for responding. Looking at the agreement, it is a stock redemption by the company.

 

[BIG E]

Then your statement "The 9% owner is being bought out by the 90% owner" is not true. The corporation is purchasing it directly, then the 90% owner is purchasing it as a separate transaction.

 

[DEW]

You are correct. The company is purchasing the individuals stock. What would be the entries to record this and is it reported on a 1099S?

Thanks for the help.

 

[BIG E]

1099-S reports sales of real property, not shares of stock of a corporation. I believe the proper 1099 issued is 1099-B.
Since there is a transfer of shares INSIDE the corporation, when the 9% owner redeems his/her shares, the entry is

DR. Treasury Stock (for stock price when first issued
CR. Cash
If there is a differential of Cash, the adjustment gets posted to Additional Paid in Capital.

Upon issuance of new shares of stock to 90% owner, the entry is:
DR. Cash
CR. Common Stock (FMV of shares)

Additional amount received would be CR. to Additional Paid in Capital