How to Withdraw From an S Corporation Ownership
In order to withdraw your ownership stake in an S corporation, you must find a willing buyer for your corporate shares. The sale must meet the conditions laid out in the corporate operating or buyout agreements, which detail when a shareholder can leave the company. Selling your ownership stake in an S-corp also can generate tax consequences, especially if you received a salary from the company.
Generally, ownership of an S-corp is transferable to any U.S. citizen, allowing you to exit the company if other shareholders or an outside buyer will purchase your shares. The S-corp operating agreement can restrict how and when a shareholder can leave. If you find a willing buyer but are limited in your options by corporate bylaws or a buyout agreement, you can arrange a stock purchase agreement with a qualified attorney. This agreement can supersede the stipulations of some corporate requirements. If you are a director in the S-corp, you may need to be taken out of the articles of incorporation, which you can amend in most states through a certificate of change.
Deaths, bankruptcy and mid-year ownerships changes all can result in tax implications that could be confusing. Shareholders who performed work for the company must receive reasonable compensation. Sometimes the Internal Revenue Service will calculate salary based on annual profits, which are broken down on a per-day scale. This could cost S-corp shareholders who sell out during a period of low profits, missing the higher earnings from later in the year but still paying for it due to the per-day scale. This misrepresentation can be corrected if other shareholders agree.
Shareholders must receive a reasonable amount of compensation from the S-corp. If your salary is low but your distributions from profits high, the IRS could reclassify your distribution from shares as wages, resulting in higher employment taxes. For example, if an employee owns 2 percent or more of the S-corp shares, then health and life insurance, along with other benefits, can be viewed as taxable income by the IRS. If you made a profit from your withdrawal, you may need to file capital gains tax. A receipt for shares sold can help show that you have legally withdrawn from the S-corp, which can be required for your tax return.
The S-corp offers advantages over the limited liability company, another simple corporate structure, because shareholders in an S-corp can divest their ownership stake and not affect the operations of the business. In many states, an LLC must dissolve if a member leaves, forcing the remaining members to close all accounts and form a new corporation.