How to Sell Your Half of a Corporation

By David Carnes

Selling half of a corporation is different from selling half of its assets. Because your business is incorporated, you own shares in the corporation and the corporation owns the assets. For this reason, you must execute a share transfer agreement to sell your half of a corporation. A number of legal restrictions apply.

Pre-Emptive Rights

Corporate bylaws often have restrictions on share transfers. The most common restriction is called the preemptive right. If shareholders enjoy preemptive rights, you must offer your shares to each of the other shareholders, and each shareholder must decline your offer, before you can sell your shares to a non-shareholder. In some cases you must offer enough shares to each shareholder to allow that shareholder to maintain his current ownership percentage even after the sale. If you sell your shares to a non-shareholder, the terms of the sale must be no more favorable than the terms you offered the shareholders; you cannot offer a lower price, for example.

Regulation D

Under federal law, to offer your shares for sale, you must either register with the U.S. Securities and Exchange Commission or qualify under an exemption. Since registration with the SEC could cost hundreds of thousands of dollars, most people choose to comply with the terms of Rule 506 of SEC Regulation D. Under this exemption, you may sell your shares only to certain types of investors: corporate insiders, for example, certain institutional investors, or individuals that meet minimum net month or annual income requirements. You must provide these investors with enough information about the company to allow them to make an informed purchasing decision.

Ready to incorporate your business? Get Started Now

Share Transfer Agreement

To sell your shares, you must execute a share transfer agreement with the buyer. The agreement should clearly identify both you and the buyer, state the price and payment terms, specify how the buyer qualifies under SEC regulations, and identify how many shares are being sold. It should also specify the rights attached to the shares: the right to dividends, for example, or the right to vote. The agreement should also specify what representations and warranties are being offered to the buyer. For example, the agreement might make statements about the corporation's financial condition that, if false, would entitle the buyer to sue the seller.

The Special Case of S Corporations

An S corporation is a corporation that qualifies for special taxation rules under the Internal Revenue Code. S corporations generally do not pay federal corporate income tax, but must observe certain restrictions on their structure. If your corporation is an S corporation, it may lose this status if you sell shares to certain types of investors. An S corporation, for example, may not include shareholders that are corporations, partnerships or nonresident aliens.

Ready to incorporate your business? Get Started Now
Steps to Sell an S-Corp
 

References

Related articles

How to Exit an S Corp

Whether you've made your money from owning an S corp or decided that you've lost too much to continue, you can end your ownership by selling off all your stock in the S corporation. However, unlike shares in a publicly traded C corporation, you might have to jump through a number of hoops to sell your stock and exit an S corp.

How to Incorporate an S-Corp in Delaware

Incorporating your business offers the benefit of limiting your personal liability, but the drawback of being subject to two levels of income tax. However, if your business qualifies, you can incorporate and elect S-corp tax status so that the income or loss avoids the corporate tax and passes through directly to your personal return. Only after incorporating at the state level can you elect S-corp federal tax status.

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

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 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 ...

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. ...

Can an S Corp Have Two Classes of Stock?

An S corp cannot have two classes of stock. The IRS sets a number of requirements for S corporations, one of which is ...

Browse by category
Ready to Begin? GET STARTED