I am shareholder in a C corp that was founded 5 years. There are
4 total and founding shareholders all of which are company officers/directors. The original share price was some trivial amount.Over the last 5 years we have accumulated a significant amount of retained earnings which has already been (corporate) taxed in prior years.
My question is what is the most tax efficient method to distribute these funds to the share holders?
1) It seems we can just issue a "dividend" which would be taxed at a personal 15% rate (and have no tax effect on the corporation).2) It also seems theoretically possible to turn it into a long term capital gain by having the corporation buy shares back at a price/ share such that the desired funds are distributed. It seems that a long-term gain for small company stock will be taxed at 14% (50% is excluded and the rest is taxed at 28%). It also seems that his will not have any corporate tax effects.
Assuming 2) is kosher, it would probably not be worth the 1% tax rate savings because of the complication. However, there is a possilility that we may decide to close the business and cease operations in 2008. In that case it seems it would be clean for the corporation to buy back most of the shares before ceasing operation.