Transferring 1% ownership of S-Corp - nuts and bolts questions
July 23, 2012 6:03 AM Subscribe
How does an established S-Corp, wholly owned by one individual, transfer one percent ownership to another individual? Nut and bolt type questions within.
posted by amcm to Work & Money (4 answers total)
I have worked for my father's business, a Delaware S-Corporation wholly owned by him, for quite some time as a contractor, and a few months ago I was hired full-time. Now we are planning on transferring 1% ownership to me. There are a few points that I need a little help with.
1. I don't know if he ever issued stock. I think the initial number of shares had to be listed on the articles of incorporation, but I'm not sure. If he did, and set a par value for them, do I just pay him (or the co) in dollars, (#of issued stock)*(par value)/100?
2. If the stock was issued, but is all treasury stock, can he just issue 99% to himself and 1% to me, with no transfer of money, but as consideration for work performed?
3. If the stock was issued and is all outstanding stock held by him, does the transaction have to take the form of me purchasing stock from him directly (private individual to private individual) or can it be done through the company (the company buying back 1% of his stock and selling it to me)?
4. If stock was issued and is all owned by him can the company issue more stock to me in such an amount to dilute his share of ownership to 99%, or does "issuing more stock" just split the shares?
I will find out the disposition of the stock either tonight or tomorrow, but would like to know about the pros and cons of these four scenarios, in case we have an option as to which route to take.
5. What would my basis be? Would it be A: The amount I paid to the company for the stock (or the dollar value of the work I performed to receive the stock) or B: 1% of the assets and liabilities of the company? Do I even have to worry about my basis if the company runs a profit every year? (we're in no danger of taking a loss).
6. We will record the transactions in a ledger. Does the transfer of partial ownership have to be recorded elsewhere, like with the Dept. of State? I doubt it, but better safe than sorry.
7. 1% of corporate profits would flow through to me, and I think this would be as simple as a check to me at the end of each year. How much more complicated is this likely to make my tax return?
8. What value does the stock have? Since it is a private company, can we set it at whatever we want, or does the price of the stock have to have a real connection to its worth? In other words, if my having 1 stock certificate will net me ten dollars every year, does the transfer price of the stock need to have something to do with that ten dollars, or can it be arbitrary, like seven cents one share? Are there any tax implications that come with an apparent value disparity between the stock price and its real world value? The company will continue to be privately held indefinitely.
I know you are not lawyers or tax pros, so no need for the acronym disclaimers. I am just looking for some guidance as to where to start thinking about this. Once I have a starting point I can usually find the laws and figure it out from there on my own.
Thanks in advance!