Originally Posted by Jason88
#1; is the actual transfer of stock a taxable event? Would any share holder have additional tax liabilities within the actual buying/selling of stock?
#2;IE:If shareholders #1, 2 and 3 each 'sold' or transferred 5% of their stock to shareholder #4, is there any tax liability on that transaction itself?
#1, 2 and 3 have no intention of selling the stock for monetary gain. #4 has built the business from the ground up and all shareholders agree that he/she deserves to be an equal partner in the business after 30 years.
#1;First of all regarding the actual sale/ transfer of yur stock to #4 individual, I imagine that the answers to your questions depend entirely upon the terms and conditions of the corporate articles, bylaws, buy-sell provisions. I think this is more a legal question than accounting. Once the method of transfer OR actual sale is determined, then the accounting/tax side of it can be addressed. It should state in your by-laws how stock is transferred or any limits that may have been placed on transfers or sales. Does your company have by-laws? The by-laws should have been prepared by an attorney who is familiar with the laws in the state the company was incorporated in. If you do not have by-laws, you might want to check the statutes yourself to see if there are any special requirements for transfers of stock. In general, the ownership interest transferred to another owner/ employee is taxable income as compensation. S Corps shares can be bought or sold via share purchase agreements and all changes in the ownership should be reflected in the share ledger in the corporate minute book.
NOTE: Tax effect of selling your S Corp stock can be either a stock sale( in your case) or an asset sale; sellers nearly always prefer to structure the transaction as a stock sale so that they are taxed at LTCGs rates rather than ordinary income tax rates. Furthermore, such a sale transfers any liabilities with the business to the buyer."In certain situations, the IRC allows a stock sale to be treated as an asset sale for tax purposes. In certain situations it will result in higher after-tax proceeds to the
selling shareholders and more value to the purchaser."To meet this criteria, the purchaser must be a corporation.There is no straightforward formula for estimating your taxes, particularly if the sale is an asset sale and/or you opt for an
installment method for receiving payment. The nature of your S Corp, and how you elect to structure the sale, make the calculation very complex. Please contact a CPA/an IRS EA in your local area for more info in detail.
#2; Most S corps with multiple shareholders should have a written shareholders' agreement in effect for a simple reason. A shareholders' agreement reduces the chance and diminishes the costs of a shareholder intentionally or unintentionally doing something that terminates the S corp's "S" status. One of the things that should appear in the shareholders' agreement is a list of actions that individual shareholders agree not to take. For example, an S corp shareholders' agreement should document shareholder promises not to sell stock to an ineligible S corp shareholder (since such a sale would terminate the S corp status).So as mentioned , you might want to check the statutes yourself to see if there are any special requirements for transfers of stock UNLESS you have your by-laws.