Implications of Being a 50 Percent Shareholder in an S Corp.

By Cindy DeRuyter, J.D.

Implications of Being a 50 Percent Shareholder in an S Corp.

By Cindy DeRuyter, J.D.

Owning 50 percent of the shares in a corporation that qualifies for S corporation status gives you a right to one half of the company's profits. However, you are still a minority shareholder, or investor. There are several important factors you should consider before agreeing to purchase or accept a 50/50 share of an S corporation.

Two businessmen working on laptop together

To qualify for S corp. status, a company must have no more than 100 shareholders. If you own 50 percent of the company's stock and 99 other shareholders own the remainder, you theoretically exert a great deal of control over the company. In reality, however, you may not wield enough voting power to effect change because the other investors could join together in opposing and countering your votes.

Management Decisions

When two people join together to start a business, it is normal for them to want to establish 50/50 ownership over the new company. However, doing so without careful planning can lead to corporate gridlock. With company ownership split neatly down the middle, it is impossible to reach either a majority (51 percent of the vote) or a super-majority (⅔'s of the vote) for shareholder decision-making. If the shareholders do not contemplate and plan for this potential eventuality by including deadlock or tie-breaker provisions in their shareholder agreement, courts may get involved in deciding the disputes.

It's natural to assume that owning ½ of an S corporation gives the investor a 50 percent vote for management decisions. In reality, however, the shareholder agreement and company bylaws may empower officers and directors to handle daily operating matters without involving the shareholders or even seeking their input. Owning 50 percent of the company may mean you have less authority than you think you have.

Implications of Distributions

In corporations that have qualified for S corp. status, the investors split profits according to their share of ownership rights. So a 50 percent investor would receive 50 percent of the profits.

Tax implications for S corporation investors are also different compared to those for C corporation. With an S corp., the company does not pay taxes on its income at the business level. Instead, the individual investors are each responsible for reporting and paying income taxes on their respective shares of the company's income. This business characteristic, also referred to as pass-through taxation, can be beneficial for some small business owners.

Shareholder Rights

Finally, when someone forms a corporation, they do so under state-specific laws. Those state laws differ but generally include provisions designed to protect minority shareholders. Before deciding to accept or purchase a 50 percent share of an S corporation, be sure you understand the obligations and protections your state's laws offer you in that capacity.

If you want to establish a new corporation or other small business and elect S corporation status for tax purposes, be sure you understand the implications of your decisions. Consider your short and long-term goals, and personalize bylaws and resolutions prior to incorporating your business.

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.