How to Withdraw From S Corporation Ownership

By Larissa Bodniowycz, J.D.

How to Withdraw From S Corporation Ownership

By Larissa Bodniowycz, J.D.

An S corporation is a corporation that has elected to be taxed on a pass-through basis. The S designation has no bearing on the process for withdrawing from the corporation. It is the same as for a C corporation, and it can be complicated. The exact process will vary based on the terms of your corporate agreements and your fellow shareholders' willingness to help with the transition.

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1. Review Your Corporation's Documents

Start by reviewing your corporation's governing documents including the articles of incorporation, bylaws, buy-sell agreements, and any contracts you have with the corporation itself or other shareholders. Often, one or more of these documents will include provisions related to transferring shares.

Look for provisions that tell you who you can transfer or sell your shares to and how your shares need to be priced. For example, you may be required to offer to sell your shares to the other shareholders before you can sell to a third party and there may be a preset formula for determining the price you must sell your shares at. Or, the corporation might be required to buy your shares back from you.

You must follow all rules and restrictions related to your transfer of shares unless your other shareholders and/or board members, depending on the agreement, agree to deviate from the provisions.

2. Reach Agreement Regarding Share Transfer

Next, decide who you will transfer your shares to and at what price. Typically, you will transfer your shares back to the corporation itself, to one or more fellow shareholders, or to a third party. Price can be negotiated unless it has been set by a corporate document. Again, you must abide by any restrictions in the corporate documents, or you risk having the transfer set aside or being sued.

Talk to your personal legal and tax advisers when making this decision. There are tax implications of transferring your ownership interest, particularly if you make a profit or sell it for a price below fair market value, and if you have multiple options, some options may be better than others from a tax perspective. Do not rely on the corporation's attorney or certified public accountant (CPA) because their duties are to help the corporation, not you as an individual.

3. Transfer Shares

Once you have reached an agreement regarding the terms of the transfer, that agreement should be memorialized in a writing signed by all parties to the transaction, usually called a stock purchase agreement or something similar.

After the agreement, you must actually transfer the shares. This is usually done by endorsing the physical stock certificate to the new owner, and by providing notice and the certificate to the corporation. Typically, the corporation cancels the old certificate and issues a new certificate to the new owner and records the transaction in its share ledger.

If you are on the board of the corporation, as many S corporation owners are, you will also need to decide whether to remain on the board or resign. If you chose to resign, submit a signed and dated resignation letter to the board.

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.