J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Financing Options to Fund Buyouts

Buying out the interest of a departing owner can be paid for in a variety of ways. Most common are:

• Company buyouts. The interest of the departing owner is acquired by the business, leaving the remaining owners with greater ownership interests. The company may set aside money for this purpose (e.g., a corporation may use retained earnings to buy out a retiring owner). Alternatively, the company may pay for the departing owner’s interest through profits over time.
• Life insurance. Usually, insurance is used to buy out a deceased owner’s interest. However, insurance can also be used to pay for a retiring owner. Work with a knowledgeable insurance agent to structure insurance financing for a buyout.
• Installment sales. A departing owner may sell an interest under an installment payment agreement.

In the past, private annuities were often used in family situations to transfer ownership to the younger generation at favorable transfer tax costs. However, changes in the tax treatment of private annuities mean this method is no longer used.