How to Remove a Shareholder From an S Corporation

By Kelley Stanczyk

S corporations have a special tax election with the Internal Revenue Service under Subchapter S of the Internal Revenue Code. This allows S corporations to not pay federal income taxes; instead, they elect to pass their income and losses through to their shareholders who then apply them on their personal income tax returns. The Internal Revenue Service places eligibility restrictions on corporations that want to make this Subchapter S election, particularly restricting the type of shareholders an S corporation can have. As a result, many S corporations include specific provisions in their shareholders agreement to remove shareholders if they become ineligible and permit the S corporation to buy out a shareholder voluntarily or involuntarily.

Follow Shareholders Agreement and Bylaws

Step 1

Check the shareholders agreement of the S corporation for the general procedures or recommendations for removing a shareholder. Although shareholders agreements vary from organization to organization, these provisions should provide directions for the buyout of shares and the approval that is necessary to remove a shareholder.

Step 2

Determine whether the shareholders agreement addresses the issue of removing a shareholder. If it does not, the default provisions of the state's corporations statute apply, as each state has enacted different laws covering this process.

Ready to incorporate your business? Get Started Now

Step 3

Determine if the shareholder removal is voluntary or involuntary. If the shareholder's removal is involuntary, there likely must be a violation of the bylaws, as the bylaws control.

Create a Resolution

Step 1

Create a resolution for the removal of the shareholder that will be presented before the governing board – either the board of directors or designated shareholders, depending on the procedures set forth in the shareholders agreement.

Step 2

Devise the resolution. The resolution does not need to be formatted in any specific format, although it must provide the buyout request and should state the grounds for removal. Ideally, the grounds for removal should be a violation of a provision in the bylaws. For example, becoming an ineligible shareholder under the S corporation eligibility requirements set forth in Subchapter S of the Internal Revenue Code. If the bylaws do not establish grounds for the involuntary removal of a shareholder, he can be removed only if he violates some provision of the state's corporation statute, such as committing fraud against the corporation.

Step 3

Sign the resolution and obtain the signature of the corporate secretary.

Remove the Shareholder

Step 1

Call a meeting and present the resolution for a vote of approval before the governing board – the board of directors or designated shareholders, whichever the shareholders agreement determines. Once the required vote is met, obtain the signature of the corporate secretary.

Step 2

Look to the shareholders agreement for directions on the buyout procedure of the removed shareholder's ownership interest. Buy the shareholder's ownership interest at fair market value and adjust the remaining shareholder capital accounts accordingly. The valuation method used to determine the fair market value of the shareholder's ownership interest should be specified in the buy/sell provisions of the shareholders agreement.

Step 3

Ensure the shareholder is officially removed from the S corporation when you adjust the shareholder capital accounts.

Ready to incorporate your business? Get Started Now
How to Get an S-Corporation Enterprise



Related articles

How to Remove an Officer From Articles of Incorporation

A corporation is organized under state law by filing articles of incorporation that specifically conform to the state's statutes. Most states make listing members of the board of directors in the articles optional or require only a listing of initial directors but not updates when the composition of the board changes. If a corporation chooses to list board members and wants the information to be current, it can change the names by amending the articles of incorporation.

How to Change a Director of a Corporation in Ohio

The board of directors of a corporation provides guidance and oversight on behalf of shareholders. Ohio's corporation statute provides default provisions that govern the replacement of directors with or without cause, if the corporation has not made provisions for the replacement of directors in its articles of incorporation or bylaws. If the corporation has adopted written procedures for adding and removing directors from the board, they trump the default provisions of the state statute, as long as they do not conflict with the basic tenets of the law. Typically, the corporation's bylaws either give the board of directors the power to replace directors upon a vote of the board or require a full vote of shareholders holding voting stock.

How to Transfer Stock in My S Corporation

An S Corporation is a business that registers with the Internal Revenue Service to obtain special tax benefits. To hold this status, the business must comply with several regulations. Part of these regulations, which are defined by the Internal Revenue Code, restrict who may own stock. If you transfer stock to a person or entity that is prohibited from owning S corporation stock, the business will automatically lose its tax status. As a result, many S-Corps have agreements in place that may limit to whom a shareholder may sell her shares.

LLCs, Corporations, Patents, Attorney Help Incorporation

Related articles

How do I Remove LLC Board Members?

A limited liability company, or LLC, is a form of business organization that provides the benefits of pass-through ...

How to Withdraw From S Corporation Ownership

An ownership interest in an S corporation is represented by shares of stock. As with any corporation, you can withdraw ...

How to Convert a C Corporation to an S Corporation With Shareholder Approval

A regular corporation, also known as a C corporation, can make an election with the Internal Revenue Service to receive ...

How to Convert an S Corporation

S corporations elect to pass corporate income, losses, deductions and credit through to their shareholders for federal ...

Browse by category
Ready to Begin? GET STARTED