I am buying into a physician practice organized as an S Corp. The Corp recently bought out 4 of 7 partners due to retirement. The buyout was for 25% of a partner's share each year for 4 years. For my buy in the group is proposing a flat buy in roughly equal to the amount of 1 year of partner income, payable over 4 years via a loan from the group.

For a number of reasons, this system doesn't seem to make much sense to me compared to the structure proposed at https://www.acponline.org/system/fil...ncome_dist.pdf

Said structure would establish a nominal price to the shares with an employment agreement stating a pre tax 25% reduction in income for 4 years. Likewise at retirement, a buy back of nominally priced shares with a deferred compensation of 25% over 4 years.

My question is, do I understand correctly that S Corp partners must be paid in proportion to their shareholding? Would a pretax salary deduction therefore not work in an S Corp?

My question is, do I understand correctly that S Corp partners must be paid in proportion to their shareholding?===========correct. An s corp shareholder/employee is not usually called a partner, it is an s corp shareholder/employee; in general, unlike regular corps, an "S corp" does not pay corporate income taxes on its profits. Instead, thes corp profits are allocated to shareholders according to their stake in the company, and the shareholders report those profits as taxable income on their personal returns on 1040. This is the case regardless of whether the shareholders actually received any money. If an S corp with 1k shares has a $100k profit, then shareholders must report and pay taxes on $100 in income for every share they own.An S corp shareholder who performs more than minor services for the corporation will be its employee for tax purposes, as well as a shareholder. However, an S corp must pay reasonable employee compensation ,subject to employment taxes, I mean social taxes, to a shareholder-employee in return for the services the employee provides before a distribution ,not subject to employment taxes, may be given to the shareholder-employee.


Would a pretax salary deduction therefore not work in an S Corp?====================as mentioned above:yes.however it depends. What I mean is that unlike the benefits costs paid by regular W-2 shareholders employees of an s corp, which are pre-tax deductions in payroll, benefits paid by an s corp for its owners ,any shareholders who own more than 2% of the company, are considered part of the owner's taxable wages, and aren't deducted in payroll.

Thanks for the reply. As I mentioned my Corp currently has the equal shareholders. It's a group of physicians, and even though it's organized as an S Corp, the thought and terminology that gets thrown around is largely more like that seen in a partnership. Hence my "partnership buy in" is a purchase of treasury shares to become an equal shareholder. There is a clause in my contract that stipulates that money received for the sale of stock will be shared amongst only shareholders who have been full shareholders for at least 5 years "senior partners". In effect when the 3 physicians in the pipeline after me purchase shares, I will see none of that money. I thought one of the tenements of an S Corp was not tiers to the shares, i.e. an equal distribution. Is the sale of stock perhaps treated differently than income?

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S Corp was not tiers to the shares, i.e. an equal distribution. Is the sale of stock perhaps treated differently than income?=========== correct:basicaklly, aslongas the,say, selling shareholder meets at least one of the tests under IRC Section 302, the disposition of his stock will be either sale or exchange, and the taxpayer, I mean the seller, will report the sale just as if it were a sale to a3rd-party individual. In that case, the selling shareholder will recognize gain or loss ,and this gain or loss will be capital gain or loss provided that the shareholder had held these shares as a capital asset.