Does Selling 100 Percent of Stock Terminate an S Corporation?

By Ari Mushell, J.D.

Does Selling 100 Percent of Stock Terminate an S Corporation?

By Ari Mushell, J.D.

S corporations are business entities that qualify under Subchapter S of the Internal Revenue Code for taxation as partnerships rather than as corporations. An S corporation (S corp.) can have a maximum of 100 shareholders, and company shares can be sold, though they cannot be offered on the open market. Internal Revenue Service (IRS) regulations restrict ownership rights of shares.

Man speaking on phone while looking at desktop computer

If shareholders sell all of the stock in an S corporation, the S corp. does not terminate. This is especially relevant for S corporations because stock is often held by only a few individuals who may agree to sell company shares at the same time. When selling shares, however, you must follow three important guidelines so that the corporation does not lose its S corp. status.

1. Adhere to the corporation's stock transfer rules.

The bylaws of an S corp. should contain rules describing how to sell shares in the company. The rules may outline requirements when purchasing all the shares of the corporation. Note that some S corporations mandate that any purchase of 100 percent of the stock must come from a sale with the corporation itself, meaning that shareholders seeking to sell stock first transfer it to the corporation, which then resells it to the new purchasers.

Additionally, sales of shares in an S corporation may, according to bylaws, require shareholder consent, which is often the case when the stock transfer is for 100 percent of the shares. In such an instance, be sure to obtain a written statement of shareholder consent for the sale.

2. Transfer stock only to eligible counterparties.

A sale to an ineligible counterparty may render the sale void, based on corporate bylaws. Such a sale might also trigger removal of the S corp. status, which means the business would continue as a C corporation but lose its S corp. tax benefits.

The following are examples of ineligible counterparties that may compromise S corporation status:

  • Banks
  • Insurance companies
  • Nonresident aliens

3. Maintain records of any sales of shares.

Corporate bylaws and state law require that the sale of shares, especially 100 percent of the shares, be memorialized in the corporate ledger. Therefore, when preparing for the transfer of stock, the sale must be recorded as the official business of the corporation. This means that the corporation's corporate secretary notes a shareholder vote and the results of that vote, creating a written record of express consensus for the sale of the shares.

Shareholders of an S corp. can sell 100 percent of the shares in the corporation without the corporation terminating. However, the sale should follow the S corporation's bylaws for sale of the shares and IRS guidelines for who can become a shareholder. Also, all corporate action related to the sale should be properly documented.

If shareholders do wish to terminate an S corporation, the company must wind up its business affairs by filing articles of dissolution, or a similarly named document, with the state agency that regulates businesses. An attorney or online service provider can help with this process.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Ready to incorporate your business?

Get started now