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Old 08-27-2013, 10:22 AM
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Redistributing stock within existing S-Corp while avoiding additional tax liabilities

Hypothetically:

The company in question is an existing S-Corp. There are four shareholders:

#1: 30%
#2: 30%
#3: 30%
#4: 10%

Is there a way to redistribute the existing stock within the company so that all four partners own equal shares of the company (25%) without having any additional tax liabilities?

Thanks in advance for your responses.



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Old 08-27-2013, 01:26 PM
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Originally Posted by Jason88 View Post
Hypothetically:

The company in question is an existing S-Corp. There are four shareholders:

#1: 30%
#2: 30%
#3: 30%
#4: 10%

Is there a way to redistribute the existing stock within the company so that all four partners own equal shares of the company (25%) without having any additional tax liabilities?
#1; I do not think so.Changes in the ownership of S Corps are governed by shareholder agreements. While all corporations with multiple shareholders should have shareholder agreements in place, often many corporations do not have one. shareholder agreements spell out the terms and conditions under which shareholders may buy, sell, or transfer their shares in the corporation. Transferring the ownership in an S corp is accomplished by one party selling shares to another. SO,Generally speaking, without a shareholders agreement in place, shares can be freely purchased or sold without restriction. As you can see, while an S corp is not taxed on its profits, the owners/EEs of an S corp are taxed on their proportional SHARES of the S corp's profits.



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Old 08-28-2013, 09:04 AM
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I guess I should rephrase my question. I understand that tax liability is passed on to each shareholder proportionally. My question is, is the actual transfer of stock a taxable event? Would any share holder have additional tax liabilities within the actual buying/selling of stock?

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.


Last edited by Jason88 : 08-28-2013 at 09:08 AM.


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Old 08-28-2013, 12:15 PM
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Originally Posted by Jason88 View Post



#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.



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