Discussion:Question about S-Corp Shares
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Discussion Forum Index --> Accounting Questions --> Question about S-Corp Shares
| 19 January 2008 | |
| Hi,
I have a question about S-Corp shareholdings: Say I start an S-Corp with 2 shareholders in a 50/50% split (100 shares each), each contributing $10,000. The corporation comes up with a new business plan and 12 months later attracts an investor who will invest $500,000. This investor will be on the board of directors but will not participate actively in running the business. Can the corporation decide how many shares to issue to the new investor for his $500,000 - for example 100 shares? Or is the number of shares tightly coupled to the ratios of the amounts of capital invested by each investor? Thanks, Blueman | |
Bottom Line (talk|edits) said: | 20 January 2008 |
| How many shares were authorized by the articles of incorporation? If 100 shares were authorized and these were issued to the two initial shareholders, the new investor would need to purchase stock from the two initial shareholders. | |
| 20 January 2008 | |
| This is for a new company - not started yet. So - lets assume that there are still authorized shares available to issue. Lets say there are 500 authorized. | |
| 20 January 2008 | |
| I see a potential problem with this as setting up a 2nd class of stock - which is prohibited in S Corps. | |
| 21 January 2008 | |
| Issue 300 shares for 30000 and record the remainder as either APIC or N/P Shareholder. Also I don't think amount of investment would determine a second class of stock as long as the shareholders were equitably treated based on ownership. | |
| 21 January 2008 | |
| This investor will be on the board of directors but will not participate actively in running the business.
Doesn't that sound like a distinction in ownership? | |
| 22 January 2008 | |
| There is no requirement that shareholders participate in the business attached to stock ownership. | |
| 15 February 2008 | |
| Another S corporation accounting question...how do you record the entries for an S corporation when an existing shareholders sells shares to another existing shareholder? Are the capital accounts of each shareholder changed to reflect the purchase and sale of shares?Proven 21:26, 14 February 2008 (CST) | |
Phil Moody (talk|edits) said: | 15 February 2008 |
| If the investor does not care how many shares he purchases (which I doubt)??, then I would issue him 1/1,000,000 of one share. I would not want to be too greedy. | |
| February 15, 2008 | |
| Proven, that sounds like it's just an entry in the minutes and the stock book. The transaction is actually between the shareholders, which is not on the corp books. | |
RoyDaleOne (talk|edits) said: | 15 February 2008 |
| The transaction could be between the Corp. and the new shareholder. I can not believe an investor would pay $500,000 to anyone without a written agreement as to what ownership the investor is to receive. The Corp. may or may not need to amend its charter for more shares. The Corp. could sell one share for $500,000, or almost any amount agreed upon. The Corp does not have to be an S Corp. the rules are the same relative to the Corp. | |
| February 15, 2008 | |
| Roy, if you are replying regarding my post, I was answering Proven's question. | |
| 15 February 2008 | |
| Look into the articles of incorporation and source documents to find the par and number of shares issued. Then start from there. | |
Cliffyoung (talk|edits) said: | 25 February 2008 |
| If an S-Corp was set up by a tax attorney years ago with A shares (voting) and B shares (non voting):
1. Is that a legal document? 2. How may it be undone and corrected at this point, as the 3 owners now own different amounts of shares than they did upon inception? | |
Bottom Line (talk|edits) said: | 26 February 2008 |
| Sounds like it's not an S because there are two classes of stock. Does the "tax attorney" have E&O insurance? | |
TheTinCook (talk|edits) said: | 26 February 2008 |
| I don't see anything to indicate two classes of stock. As far as the S-Corp regs are concerned, the only thing that matters is that each share gets the same amount of dividend/distribution in the same priority. Stock can have different voting or control rights with out breaking the prohibition against two classes of stock. | |
| 11 March 2008 | |
| you can issue how ever many shares (up to the amount authorized) of stock for the 500k that you want. the amount of shares you issue will determine his ownership/distribution %. | |
