If it’s possible, how would I later convert the C CORP to an S CORP? What are the implications for me, the business, and other issues?
i) As long as you own part of the C-corporation via your 401k the entity must be Corporation taxed as a C-corporation.
What are the steps for the C-Corporation buyback stock from 401k?
- As far as the mechanics of the buybac
k, the corporation would purchase the stock back from t he 401k over one or a series of purchase provided that it would have to do so at fair market value at the time of each buyback.
- The value of the company stock should be supported by a third-party business
- The money would flow from the corporate bank account back to the 401k broke
rage account on a tax-deferred basis.
- As the 401k sells stock back to the C-corporation, the number of shares held by the 401k will decrease. As a result, the 401k will own a lower percentage of the company.
- Conversely, the other owners of the business (i.e. you) will owner a greater percentage of the business.
- If the C-corporation buys back all of the stock from the 401k, you will no longer own company stock through the 401k and the other owner(s) will thus own 100% of the business
- The C-corporation must buyback the stock at fair market value.
- While the IRS doesn’t necessarily specify items that must be in the report, they have issued guidance on valuing a closely-held corporation (e.g.
, see IRS Revenue Ruling 59-60).
- Moreover, it is certainly a best practice if the valuation is prepared by a third party who is a business valuation specialist or someone who has relevant training and experience.
- The corporation would continue to sponsor a 401k but you would no longer own shares via the 401k.
- The proceeds of the stock buyback will be deposited in the 401k brokerage account & you can invest those funds however you see fit (e.g. stocks, bonds, mutual funds, etc.).
- Generally, unless you are age 59 1/2 or over, only amounts that were transferred to your 401k from other IRAs or former employer plans are the only funds that can be transferred to an IRA.