Corporate Stock Transfer Agreement
It also known as a share purchase agreement or a stock purchase agreement, is used to sell or transfer one's shares in a company to another individual.3 min read
2. Transferring Stock Ownership in S Corporations
Updated July 10, 2020:
A corporate stock transfer agreement, also known as a share purchase agreement or a stock purchase agreement, is used to sell or transfer one's shares in a company to another individual.
Basics of a Share Purchase Agreement
Whenever a business or an individual sells or invests in shares of another company or from another individual, a share purchase agreement should be applied. For example, if two partners divide the shares of a business equally and one partner decides to leave the business, a share purchase agreement can be used to transfer his or her shares to the other partner. If an individual is purchasing all of the shares of a business, then a purchase of business agreement is used.
A share purchase agreement contains details such as:
- The buyer and seller of the shares
- The business the shares are transferring from
- The amount of shares and their worth
- The law that presides over the agreement
- The type of shares
Also included in a share purchase agreement is payment information such as:
- Deposit requirements
- Due date of the total payment
- Deadline of the agreement
There are two forms of shares and two classes that are used when determining shares. The two most popular forms of shares are voting and non-voting. Voting shares provide the stockholder with the following benefits:
- The ability to vote on corporate policy
- The ability to vote on board of director positions
Non-voting shares do not offer any voting benefits.
There are two parties involved in a share purchase agreement: the buyer and the seller. Both are required to sign the share purchase agreement. Although a witness of the signatures is not required, it is recommended if there is any suspicion that one of the individuals or parties might deny authorization. A notarization is also recommended in this type of situation so that there is no question as to the validity of the agreement.
There are many types of documents used when handling a corporate stock transfer, including:
- LLC Certification Form
- Corporate Resolution
- DRS Request Form from the stockholder
- DWAC Request Form for the stockholder
- DWAC Registration Transfer Instructions Form
- Shareholder Representation Letter
- Standard Legend
- Stock Power
- Sole Proprietorship Form
- Shell Verification Form
- Warrant Exercise Letter
- Partnership Certification
- Trust Certification
- Transfer Cost Basis Form
It is important that individuals and businesses understand how these forms work and their purposes. This helps to provide an organized service that meets the requests and requirements of the business and its shareholders.
Transferring Stock Ownership in S Corporations
Most business owners choose to operate a corporation because it provides protection from personal liability. However, corporations are also subject to double taxation, which means owners pay a corporate tax on their company's profit as well as an individual tax on the money earned through dividends.
S corporations offer owners a way to receive the benefit of personal liability protection while avoiding the double taxation of a standard corporation. While this sounds like the obvious choice, it is important to note that there are many restrictions, primarily concerning share purchases, included with S corporations.
Due to these restrictions, there are five things individuals should consider when planning to transfer shares from an S corporation to another person:
- To prevent owners from abusing the taxation benefits of an S corporation, tax laws only allow S corporations to have a maximum of 100 stockholders.
- Tax laws prohibit partnerships and outside corporations from owning S corporation shares. Only individual stockholders, a deceased stockholder's estate, and certain trusts and charitable organizations may purchase shares in an S corporation.
- Non-resident foreigners may not hold S corporation shares.
- Outside of the tax laws, S corporations often impose a stockholders' agreement that narrows individuals options when it comes to selling their shares. Typically, these agreements include a right of first refusal, meaning that current stockholders can purchase the shares under the same agreement offered to an unrelated purchaser.
- Stockholders' agreements of S corporation typically designate a price at which shares can be transferred between shareholders. Usually included in an agreement is a phrase stating that sales of shares cannot lead to an annulment of the S corporation's tax benefits.
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