How to Change Ownership in an S Corporation

building image by peter Hires Images from Fotolia.com

In an S corporation, owners, called shareholders, pass on income, deductions, credit and losses to all shareholders. Medium and large companies commonly use this federal business organization method in the United States. In it, the domestic company has no more than 100 shareholders and one class of stock. Changing ownership in an S corporation is possible but it must be done according to the agreements and contracts in place at the time of the transfer of ownership.

Determine if the seller of the stock in the S corporation rightfully has ownership of the shares he wishes to sell if you are the buyer of the stock. Verify this information through the investment broker or company you work through to process the transaction. In this type of corporation, shareholders own the company and the only ownership change occurs when a person buys or sells shares in the company.

Verify that the current owner has stock in the company that he can sell. Determine how much the owner has in the company. Since most companies limit the sale of stock to a specific amount, in order for ownership to change hands, one owner must sell a specific amount of stock to a new owner.

Utilize a certified public accountant to determine the financial value of the stock changing hands in the transaction. Although buyers and sellers can perform valuations on shares themselves, parties should invest in a qualified accountant to ensure the value is clearly documented.

Make the investment by purchasing the stock from a shareholder. An attorney or investment professional managing the company's stock, can make this transaction. Use a purchase agreement to make the purchase. The purchase agreement outlines the purchase price and details of the sale, including how many shares the new owner is purchasing.

Transfer actual share certificates from the original owner to the new owner. These share certificates are proof of ownership in the company. The transfer of these documents completes the ownership change within the S corporation.

Ensure the company's shareholders do not exceed the Internal Revenue Service's limit of 100 shareholders for the company. Companies that need to sell more stocks and bonds to raise additional capital may need to change their business classification to a corporation instead.

Document the transfer with the company. The company can do this by changing the company's shareholder records.

Tips

  • Whenever ownership of stock shares changes hands, individual investors should ensure that all documentation and valuation is complete in advance of the transaction. Any specific notations or rights of the shareholder need documentation on the purchase agreement and any contract signed by the purchaser or the seller of the stocks.

Warnings

  • Those selling shares of stock within a company, including within an S corporation, may be responsible for paying capital gains taxes. Consult a tax professional about these implications before the transaction occurs.

References

Photo Credits

  • building image by peter Hires Images from Fotolia.com