Selling your shares of stock in an S corporation to a major shareholder can be as easy as an ordinary retail transaction. You put up the stock, and your business partner tenders the purchase price. The whole process can take minutes. Complications arise when you can't agree on a price or the sale is restricted by a shareholders' agreement.

Easy Transferability

An S corporation benefits from a special tax status that allows it to skip paying taxes at the entity level by passing profits and losses through to its shareholders. Despite this special status, the corporation is still legally bound by the laws of the state where it was incorporated. One of the benefits of the corporate business structure under state law is easy ownership transferability. Your ownership interest is vested in shares of stock, and you have the right to sell the stock to anyone at any time, unless the corporation puts stock transfer restrictions in place.

Shareholders' Agreements

S corporations often adopt a shareholders' agreement to control stock transfers. The corporation's tax status can be automatically revoked if shares are transferred to an individual who is an ineligible shareholder under the federal tax code. Small-business corporation shareholders may want to prevent outside third parties from obtaining an interest in the company through unauthorized stock transfers. This type of agreement can also prevent any one shareholder from obtaining more than a certain percentage interest in the company. If the S corporation has a shareholders' agreement in place, your sale of stock to a major shareholder must comply with any requirements specified in the agreement.

Business Valuation

Typically, the most complicated part of selling shares in an S corporation is determining the sales price. Without an open market for the shares, it's hard to determine the value of an ownership interest in a small-business corporation that has never been sold. If a shareholders' agreement outlines a procedure for determining how much your shares are worth, you're ahead of the game. Alternatively, you and the buyer can use any method to determine value and agree upon a sales price, including hiring an independent expert to make an appraisal. Once the sales price is agreed upon, you can complete the transaction.

Stock Transfers

A basic stock sale requires you to release your ownership in the shares in exchange for payment of the purchase price. If your S corporation uses paper stock certificates, you should sign them over to the major shareholder who is buying you out. Many S corporations skip issuing paper certificates and simply keep track of ownership in the corporation's stock ledger. A change to the ledger showing the name and address of the new owner of the shares is enough to complete the transaction; however, putting the terms of the sale in writing using a stock purchase agreement gives you physical proof of the sale and allows you to negotiate ancillary matters, such as establishing a payment plan if the buyer can't make a lump-sum payment.



About the Author
