My question is 2 fold. First of all, if we have an S Corp with a father son and 76/24 ownership, and wish to make it 50/50 is this a taxable item? Can we simply even out distributions and pay, and file as 50/50 ownership?

We are a small company, 5 employees with $1.5M sales and only the 2 owners. Is S Corp the right entity type?

Any help or suggestions are greatly appreciated.

“My question is 2 fold. First of all, if we have an S Corp with a father son and 76/24 ownership, and wish to make it 50/50 is this a taxable item? Can we simply even out distributions and pay, and file as 50/50 ownership?”-----> Changing ownership in an S corp is possible but it must be done according to the agreements and contracts in place at the time of the transfer of ownership; the 1120S should reflect the actual ownership of shares. Your corporation should have shares or an Agreement. You would transfer the one share or modify the agreement to represent the new ownership percentage.However,there is a special rule called a related party transaction that is a business related transaction conducted between two parties that have a relationship with each other. Such transactions are legal, but they can create conflicts of interest and there are certain circumstances where they will not be allowed. Companies that are publicly traded are required to disclose related party transactions on their financial statements. For companies with a legal requirement to disclose, a related party transaction can occur between a company and a major shareholder, officer, director, or family member of any of the previous. Special relationships are enjoyed between companies and people in all of these classes. Companies usually assemble panels to make decisions about proposed related party transactions to determine whether or not a transaction is legal and justifiable.For example, as you trade capital asset to a related party, ordinarily NO gain or loss is recognized (under the usual rules for like-kind exchanges ). However, if the related party, son, sells the capital asset he received within two years, both parties will be taxable on any gains you deferred through the exchange. This two-year rule does not apply if the sale occurred because of the death of either related person, an involuntary conversion (due to casualty loss, condemnation, etc.), or if the parties can establish that the main purpose of the exchange and later sale were not mainly designed to avoid taxes. So, if you sell capital assets to a close family member, or to a business entity that you own or control, you might not get all the benefits of the capital gains tax rates, and you might not be able to deduct all of your losses,depednsing on the situation.
You may be able to eliminate related party transaction issues by changing the ownership of the related party such as transferring or disposing of interests in shares in the S corp to an unrelated third-party in order to get the related party's ownership interest below the 50% level. Things considered when making a decision about a related party transaction include the benefit to the company, as well as the other party, along with the value of the transaction and the nature of the transaction. If the company suspects that a conflict of interest may be created, it will not go through with the transaction. Likewise, if transactions appear to be illegal business practices, the company will not move forward. It appears that the constructive ownership rules apply in determining the ownership of stock of the S corp; for example, under the law you, a father. are considered to own constructively all stock actually owned by your son.
ALSO, if you "turn over" part of your shareholder interest to your son, you may be creating a taxable gift. If you own, say, 760 shares in the S-corp and the value of each share is $100, then your interest would total $76K. If you gave your son 260 shares, that would represent a gift of $26K, which would certainly exceed the annual gift tax exclusion amount of $13K in effect in 2012.You need to file Form 709.you can check your brokerage statement for information on the original purchase price of the stock. If you do not have the original trade confirmation, you need to contact your broker, who can help you work out the cost basis of the stock.

“We are a small company, 5 employees with $1.5M sales and only the 2 owners. Is S Corp the right entity type?”---->An entity must not acquire a substantial asset from , or dispose of a substantial asset to, a related party. In the state where the business is incorporated, you will have to submit documentation to the Secretary of State detailing the changes. For tax purposes, the S corp needs to close the books and issue K-1s to the old shareholders based on the business’ financial activity up until the sale, and then issue K-1s again at the close of the year to the new shareholders.I guess you can contact the Dept of Rev of your state for more info in detail.