Key Considerations for Stock Redemption in Closely Held Corporations

ARTICLE | April 21, 2025

For many closely held corporations, the concept of a stock redemption—where a company buys back shares from a shareholder—can serve important strategic purposes. In addition to helping facilitate a smooth transition of ownership, stock redemptions may provide liquidity for shareholders looking to diversify or exit the business. From a tax perspective, redemption proceeds can be treated either as a corporate distribution (like a dividend) or as the proceeds of a stock sale (potentially taxed at capital gains rates). Given that the current individual tax rates established by the Tax Cuts and Jobs Act (TCJA) may shift after 2025, shareholders should consider planning sooner rather than later to potentially lock in more favorable rates.

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