S corp stock purchase

[SmokinBob]

How would I make an entry for the following:

S Corp stock purchased for $150,000(at date of purchase, stock listed as $50,000 liability)

$50,000 paid to selling stockholder from purchaser

$100,000 to be paid to selling stockholder by note

[qbteachmt]

@SmokinBob 

It would help to provide perspective.

Which tax form are you working in and whose is it?

[SmokinBob]

ABC Corp, an S corp with one "owner" has a stock value of $50,000 on  7/1/2020.

"owner" sells stock for $150,000 on 7/2/2020 receiving $50,000 via check from new owner and will be paid the remaining $100,000 via a 3 year note.

I think I'd credit note payable for $100,000 and paid-in capital from new owner for $50,000, but would I debit capital stock $150,000?

[qbteachmt]

Are you preparing the data for 1120S?

Are you preparing the data for the 1040?

Are you working on the Corporation's tax return?

Are you working on the Individual's tax return?

See why Perspective would be helpful? You described the event; we still have no perspective for your question.

Individuals don't typically carry Note Payable and Paid in Capital; on the other hand, the Corporation didn't sell any stock or issue new stock, if the "owner" (sole shareholder) sold his/her shares.

You described that one person bought stock from another, which would be like me selling my shares of Ford or GM to you. Ford or GM would not be involved in this transaction. If you are tracking the shareholder basis in the business' accounting records, sure, now you have two shareholders (not owners) instead of one. But the Corporation has not benefited from a sale for $150,000 of anything.

"has a stock value of $50,000"

""owner" sells stock for $150,000"

And now it also matters if this is Half the shares? 10% of the shares? Because it appears that your "owner" has a personal gain of some sort, although we don't know the original equity or basis, of course. But that seems like a nice price that might result in gain.

[IRonMaN]

If an individual sells his stock to another individual, none of that should appear on the corporation's records.  No entries to be made.

[qbteachmt]

Notice I never even asked about this part: "stock listed as $50,000 liability"

[SmokinBob]

Preparing 1120S data

Working on corporation tax return

Person A sells all of the 100 shares of ABC Corp to Person B for $150,000

Person B pays Person A $50,000

The remaining $100,000 is owed to Person A by a 3-year note secured by stock certificate and a security agreement with debtors, Person B and  ABC Corp

I guess my questions are: would I list the note on the corporation balance sheet or is it just Person B's debt and how would I handle note payments from ABC Corp on behalf of Person B?

[qbteachmt · Accepted solution]

"Preparing 1120S data"

Then you have nothing to enter for this sale that is between two private parties.

"and how would I handle note payments from ABC Corp on behalf of Person B?"

The corporation doesn't make these payments. The corporation would have Distributions to the shareholder, and the shareholder will do with the funds whatever that shareholder needs or wants to do with the funds. And that assumes this would be after Reasonable Payroll has been paid out for that shareholder, for services performed for the business, of course.

This new shareholder can have pledged the ownership of the corporation for security purposes, but that isn't the taking of a loan from the corporation and the corporation didn't just buy itself out of the prior ownership.

[SmokinBob]

Sounds good. Thanks. If it were a c corp, would any distributions(not payroll) be considered dividends?

[sjrcpa]

Yes

[SmokinBob]

Thank you for the replies. Hopefully my last question regarding this:

The S corp will file short year from 1/1 until sales date. S corp stockholder will show the stock sale on personal return. The C corp will also be filing a short year from purchase of stock until 12/31. As the purchase of stock is not part of the corporate books, can the c corp issue return of capital distributions or are all distributions considered dividends as the new stockholder did not actually contribute cash to the corp?

[qbteachmt]

What C Corp is this?

An S Corp whose shares are sold between the two individuals, doesn't change the S Corp. It didn't have a short year. It stays operating.

For this: "as the new stockholder did not actually contribute cash to the corp?"

Whether or not an infusion of cash was needed, is not related to the sale. It's a separate issue.

Let's pretend you are operating a The UPS Store franchise, running as an S Corp. You can sell your corporation to me by selling the shares; or, you can decide to sell the operation to me (assets and liabilities), but I need to form my own entity for purposes of running a business. And neither of these has anything to do with if there are not adequate funds on hand for operating needs.