How to Dissolve a Business Partner From a Corporation

By Heather Frances J.D.

When you start your corporation, you and your business partners probably get along well enough to work together, but problems often develop over time. For example, a shareholder might strongly disagree with the company’s direction but lack the influence to change it or want to get out of the corporation because of personal financial difficulties. As an independent legal entity formed under your state’s laws, your corporation can continue to exist even as shareholders come and go.

When you start your corporation, you and your business partners probably get along well enough to work together, but problems often develop over time. For example, a shareholder might strongly disagree with the company’s direction but lack the influence to change it or want to get out of the corporation because of personal financial difficulties. As an independent legal entity formed under your state’s laws, your corporation can continue to exist even as shareholders come and go.

Corporate Ownership

Unlike sole proprietorships and partnerships, corporate ownership is evidenced by owning shares of stock. For example, if you and three other business partners contribute equally to the capital costs of starting your corporation, you likely each own 25 percent of your company’s stock. Under state laws, corporate shares are the personal property of the shareholder, so they no longer belong to the company. However, the corporation, through its bylaws or other contracts, can control who is eligible to buy shares. For example, S corporations risk losing their special tax status if certain types of entities buy their stock, so their bylaws, or governing rules, may restrict stock purchases.

Ready to incorporate your business? Get Started Now

Forcing a Sale

Since shareholders own their shares as private property, they cannot be forced to sell or be prohibited from selling their shares if they wish — unless the corporation’s bylaws contain provisions directly affecting ownership or transfer of shares. Bylaws have the same effect as a contract when it comes to selling shares, so they are binding on shareholders. If the bylaws do not provide a way for a shareholder to sell his shares, he likely cannot be forced out of the company. However, if the shareholder also holds another role in the company, such as a position on the board of directors, he can be voted out of that role, thereby reducing his influence in the corporation. Losing his position might even encourage him to sell his shares and completely remove himself from the corporation.

Voluntary Withdrawal

A shareholder who wants to withdraw from the corporation can do so voluntarily by agreeing to sell or otherwise transfer his shares. Unless transfer is restricted by the bylaws, the shareholder can sell his shares to a third party, an existing shareholder or back to the corporation. Often, corporate bylaws address how stock is valued when a shareholder wants to sell his shares. If a shareholder is causing problems for your corporation or is becoming difficult to deal with but is willing to sell his shares, it could be in the corporation’s best interest to simply buy out that shareholder’s interest by purchasing his stock.

Recording Transfers

State laws and corporate bylaws make corporations responsible for keeping track of who owns their stock and in what proportion. Thus, any transfer of shares should be recorded in the corporation’s stock registry. The registry details the sales price for the stock, number of shares sold, and names and contact information for stockholders. A new shareholder must be treated like all other shareholders, even if he is not someone you know. For example, your corporation must give him an annual report, invite him to shareholder meetings and allow him to vote as described in your bylaws.

Ready to incorporate your business? Get Started Now
Can an Owner Be Voted Out of an S Corporation?

References

Related articles

Can a Sole Owner Corporation Sell Shares?

One of the most common ways to raise capital for your small business’s operations is to sell stock in your corporation. This allows you to raise funds for business expansion or to continue running your business if it’s struggling. Even if you are currently the sole owner of your business, you can sell shares to others, but you must be careful not to violate securities laws.

How to Remove a Shareholder From an S-corp

While an S corporation functions like a C corporation, it is taxed differently. Each shareholder pays taxes on his share of the corporation’s income annually and has a capital account. So when a shareholder decides to surrender his ownership, the S-corp must ensures that all of the departing shareholder’s benefits are properly paid and ensure that he pays tax on his share of the corporation’s income during the period he owned S-corp.

How to Amend a Corporation

Ideally, businesses should be set up so they don’t change very often since changing a business’s structure or other operating detail can be complicated and expensive. If your business is structured as a corporation, you may have to amend your governing documents -- articles of incorporation and bylaws -- to make changes to the corporation. However, the process to change portions of the corporation depends on the item to be changed, your state's laws and any amendment instructions in your governing documents.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Change Ownership in an S Corporation

An S corporation is a regular corporation that has made a special election with the Internal Revenue Service to pay ...

How to Remove an Officer of a Corporation

The individuals charged with making important strategic and financial decisions for a corporation must act based on the ...

What Is the Difference Between Bylaws & Shareholder Agreements?

Bylaws and shareholder agreements are two very different things. A corporation's bylaws set out the day-to-day ...

Base Salary Vs. Equity Split in an S-Corp Partnership

Business owners are able to also work in their business as employees. This means they can earn wages or base salary, ...

Browse by category