You've been in business with some fellow shareholders for a while, and one of you wants out, or one of you wants to buy the other one out.

There are a thousand different ways of going about doing this. In this blog, I want to talk about two of the easier options that you have in this situation. 

The first is to buy their shares at a fair market value. This requires you to have a business valuation done, and those can be done by a certified business valuator. These can be fairly expensive, but depending on your company, it could be well worth it to make sure that everybody is getting a fair deal. 

A second way that you can get shareholders out of a corporation is by redeeming their shares. Essentially, this means that the corporation buys the shares back from the shareholder. This would be a good option when the corporation has plenty of money in the bank and is able to afford it, and  the benefiting shareholder does not have the cash to buy them and does not want to pay personal tax on it.

When this occurs, there is a deemed dividend, as long as the money that was earned is safe income. There are some special rules when it comes to capital gains. As these rules are very technical we won’t go into that detail. 

Two main-stream options; One, redeem the shares - the corporation pays the shareholder out. Those shares get sucked back into the corporation, thus leaving the other shareholder, or shareholders, with more ownership. Two, shareholder buyout - the shareholder straight out buys the other shareholders shares.

There's advantages to the second option too. The advantage being that the seller can then (if they qualify for the capital gains exemption) claim those and pay zero federal tax, assuming alternative minimum tax is not an issue.

There might be some negotiation between those two things. If one third party wants another third party to redeem the shares instead of the capital gains exemption, then there might be a change in price slightly upwards during negotiations.  

I would highly recommend that you have qualified people on your side doing this work for you. Accountants and lawyers are very important for these transactions and could save you thousands or hundreds of thousands.