Transferring Ownership of Stock within an S Corporation

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EDT

Follow the corporation’s explicit stock transfer processes

Refer to the corporation’s bylaws or buy-sell agreement between the shareholders and the transfer of shareholder ownership. Many well-run S corporations limit stock transfers to preserve a corporation’s sub-chapter from any revocation via the accidental stock transfer to ineligible parties. An S corporation might require third party approval to whom you want to transfer the stock. It also might prohibit the transfer altogether and instead require that you sell the stock back to the corporation. S corporations are unique in that the owners of the smaller businesses do not have to pay corporate tax, only individual. Because of this, however, the IRS has specific rules to follow when it comes to transferring shares.

Draft an agreement for the stock transfer

Set up the terms of a transfer, which may involve a sale of the shares in exchange for a gift of shares or money for no consideration. Per IRS requirements, an S corporation only is permitted to have 100 shareholders or less. Usually, the S corporation is privately held, not public, primarily because of the stock ownership limitations. Shares can’t be bought and sold on the open market with a stock exchange and broker. The parties of the transfer of S corporation shares agree to terms privately and draft a contract as a written agreement.

Execute the agreement then attain consideration

Both the shareholders and S corporation must sign the stock transfer contract. If an S corporation issues a paper stock certificate, the current owner must sign them over to a new owner. If shares are being sold, a buyer must transfer payment to a seller.

Record the transfer in the stock ledger of the corporation

The S corporation must maintain an accurate ledger of stock ownership within a company. The board of directors’ secretary must note the date of a transfer and sales price, then record the social security number and the contact information of the new owner.

Prepare to consent to an S corporation election

One requirement for sub-chapter S status is that every shareholder consents to the election in writing. A consent form includes a notarized declaration that a shareholder concurs that a company must be taxed under sub-chapter S. Once the new shareholder proxy signs the form, shareholder materials can be mailed and then filed in a corporation’s records.

 

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