WheelsnWings
09-27-2014, 12:59 PM
I am considering purchasing a small business setup as an S-corp. This would be done by a stock purchase/buyout done over 5 years. Essentially the owner is retiring for health reasons and giving me the opportunity to buy in over time.
We have agreed that both of us will take a fixed income during that period and as much as possible all profits will remain in the business and become mine for working capital at the end of that period. I will be taking a reasonable salary, current owner want to be paid as a consultant not as an employee of the business.
As I understand it, taxes on the profits the company makes will be calculated on the tax rate of my salary and I will be responsible to pay that personally. First year thats ok, but as the years go on and I become an owner of great shares of the company (and eventually sole owner) the tax on the profits could completely exceed my total salary for the year. At current business level it would be well over 1/2.
So we've discussed some sort of dividend, bonus or other mechanism that lets me cover the liability I will have. If we do a dividend then the current owner will have to receive a dividend equal to his owned share - and he doesnt want to to that. If we pay me a bonus for the tax - then the tax itself is subject to payroll and income tax too, taking further profit out of the store.
I'm looking for the best mechanism to help me offset the additional tax over my salary. Any ideas?
One wrinkle is that the store owes the current owner a note for money her had to put back into the business when a big expense came up. Could we take the dividend then have the owner accept that as part of the payment for this note?
We have agreed that both of us will take a fixed income during that period and as much as possible all profits will remain in the business and become mine for working capital at the end of that period. I will be taking a reasonable salary, current owner want to be paid as a consultant not as an employee of the business.
As I understand it, taxes on the profits the company makes will be calculated on the tax rate of my salary and I will be responsible to pay that personally. First year thats ok, but as the years go on and I become an owner of great shares of the company (and eventually sole owner) the tax on the profits could completely exceed my total salary for the year. At current business level it would be well over 1/2.
So we've discussed some sort of dividend, bonus or other mechanism that lets me cover the liability I will have. If we do a dividend then the current owner will have to receive a dividend equal to his owned share - and he doesnt want to to that. If we pay me a bonus for the tax - then the tax itself is subject to payroll and income tax too, taking further profit out of the store.
I'm looking for the best mechanism to help me offset the additional tax over my salary. Any ideas?
One wrinkle is that the store owes the current owner a note for money her had to put back into the business when a big expense came up. Could we take the dividend then have the owner accept that as part of the payment for this note?