Discussion:Authorizing Additional S Corp Stock
From TaxAlmanac
Discussion Forum Index --> Basic Tax Questions --> Authorizing Additional S Corp Stock
Discussion Forum Index --> Tax Questions --> Authorizing Additional S Corp Stock
| 27 July 2009 | |
| I have a client who owns 100% of all authorized stock in his S corp. He wants another person to become a 15% stockholder for $75,000. Both parties have agreed to these terms. I am trying to figure out a way to do this with the least amount of tax consequences. (They for sure want to structure this as a stock purchase - not a loan.) If my client sells some of his stock to the other party, of course my client would have to report the gain (almost 100%) on sale of his stock. The only other option, that I can think of, is for the corp to authorize additional shares of stock and then have the corp sell the other party enough shares to make up the 15%. I have never been involved in a corp having to authorize additional stock shares so I don't know how difficult this is to do and therefore if it is feasible or not. Have any of you been involved in this process before? | |
| 27 July 2009 | |
| FLAcct
If your client sells part of his stock to the new investor, as you point out, he will realize a capital gain immediately. If the corporation issues new stock in return for a capital contribution, there's no gain or loss, but immediately after the transaction the new shareholder owns 15% of the $75,000. I think it's relatively simple to issue new shares, but you probably want the corporate attorney to get involved. You'll want the attorney to get involved in either case because it's highly recommended that a shareholder agreement be written up, including what happens at death, prohibiting transfer of shares in a way that breaks the corporation's S election (such as to a corporation or nonresident alien), and possibly an agreement about distributions needed to pay tax on phantom income. | |
Harry Boscoe (talk|edits) said: | 27 July 2009 |
| "Both parties have agreed to these terms," but "these terms" don't tell us whether the stock will be new stock from the corporation or stock sold to the new guy by the old guy. Sorta iffy. | |
Harry Boscoe (talk|edits) said: | 28 July 2009 |
| If I were the attorney, my first question might be "Do you intend to have the present shareholder sell part of his stock to the new owner, or do you intend for the corporation to issue new/additional shares to the new owner? | |
| 28 July 2009 | |
| You mean that ALL the authorized stock is issued and outstanding? Many times only some of the authorized is issued and outstanding, in which case there s/b stock to sell from the corp.
I'd read the incorporation documents. | |
