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.

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!
posted by amcm to Work & Money (4 answers total)
I am just looking for some guidance as to where to start thinking about this.

By hiring a lawyer.

Once I have a starting point I can usually find the laws and figure it out from there on my own.

Probably not this time. You need to figure out what happened before you can figure out how to make something else happen. Then you need to figure out the desired outcome in terms of function. Then you need to figure out what your options are for making that outcome happen and the consequences of each. Tax consequences, corporate consequences, the works. I can just about guarantee you that if you do this without hiring professional help, you will screw something up. That something could result in tax penalties, either now or in the future, or could lead to problems down the road in terms of liability or corporate ownership.

But the real reason no one is going to be able to answer your question, aside from the no-giving-legal-advice-to-strangers bit, is that a lot of this is a matter not of corporate statutes, but of corporate charters. Your S-corp has a charter which says how these things are supposed to work. None of us have read it, and none of us are going to. There's any number of different ways the issuing of stock and classes of stock can be set up, and we haven't the foggiest about what your particular company is doing.

Basically, you've asked a question here which represents at least a day's work for a competent attorney. We don't do this sort of thing out of the goodness of our hearts most of the time, and certainly not for the business community. There is no pro bono for commercial customers, nor should there be.

Hire a lawyer. Any money you spend on him will almost certainly wind up saving you money in the long run.
posted by valkyryn at 6:13 AM on July 23, 2012 [3 favorites]

I was going to say was valkyryn said. You need a lawyer.
posted by insectosaurus at 6:15 AM on July 23, 2012

Same answer. And probably a CPA too.
posted by seventyfour at 10:12 AM on July 23, 2012

Piling on to say that you need a lawyer and an accountant. My wife recently joined a startup structured as an S Corp (which was subsequently required) and we discovered ahead of time--by employing a lawyer--that S Corp ownership structure and tax implications were baroque.
posted by donovan at 10:54 AM on July 23, 2012

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