How to Remove a Partner From a Corporation
You typically must refer to your company's shareholder agreement or bylaws, as corporation “partners” are actually shareholders or officers.3 min read
2. Removing a Partner From an S Corporation
3. Removing a Partner From a C Corporation
Updated October 30, 2020:
If you want to know how to remove a partner from a corporation, you typically must refer to your company's shareholder agreement or bylaws, as corporation “partners” are actually shareholders or officers.
The Corporation and Partners
It's not uncommon for business partners to eventually have differences when it comes to running the company. A shareholder may, for example, disagree with the company's direction but not have enough influence to change it. Other reasons someone may want to leave the company include the following:
- Dissolution of a marriage
- Pending retirement
- A desire to pursue other opportunities
- Personal differences
A corporation can continue its existence, even with a change in shareholders.
Removing a Partner From an S Corporation
An “incorporator” is the individual or entity listed in the Articles of Incorporation as the entity that formed the corporation. There is no way to remove an incorporator. However, if the incorporator also happens to be a shareholder, you might want to know how to remove the shareholder's interest in the S corporation. The answer partly depends on the terms outlined in your shareholder agreement.
A well-written shareholder agreement typically covers the issue of a shareholder buyout, including the restrictions and required approvals. If you don't have a shareholder agreement, refer to your corporate bylaws to determine the method of transferring shares.
When all of the required approvals have taken place, it's usually a simple matter of the following to remove the shareholder:
- Effecting the stock purchase
- Canceling the departing shareholder's stock certificate
- Noting the transfer of ownership in your corporate records
In a small corporation, individuals may fill several roles, so someone could be a shareholder, an officer, and/or a director. If the departing shareholder is also a director, the removal as a director has to effected separately according to the bylaws and recorded via a shareholder resolution. Again, this must be part of your corporate records.
An Articles of Incorporation doesn't usually list a corporation's shareholders, but it may name the initial directors. It may be possible — depending on shareholder approval — to amend the Articles in order to omit the former director's name.
If the departing shareholder also acts as a corporate officer, a director will have to remove him or her as an officer, since it's the responsibility of the board of directors to elect and remove officers. A board resolution would document the officer's removal.
Removing a Partner From a C Corporation
C corporations are made up of officers, directors, and shareholders. These businesses don't have partners in the technical sense. In the simplest terms, a corporation's partner may be a shareholder or an officer.
Removing a partner actually involves removing a shareholder. This may not be as easy as it seems because once shares are issued to someone, that person becomes a shareholder.
The shareholder agreement can be instrumental in determining if and when the corporation can remove a shareholder. Depending on the agreement's terms, certain events may force a shareholder to sell his or her stock, such as the following:
- Personal bankruptcy
Otherwise, the corporation may try to negotiate a buyback of the stock.
Corporate bylaws typically outline the procedure for removing an officer. This may involve calling a board of directors meeting and then holding a vote for removal. If no bylaws exist or if the bylaws don't specifically address the procedure for removing an officer, the corporation should follow the removal procedure that's outlined in the Articles of Incorporation.
If the Articles don't provide a removal procedure, the corporation should refer to state law — specifically, the statutes that govern corporations in that state.
If the officer is an employee, his or her employment may or may not be terminated at the same time he or she is removed as an officer. If termination occurs, review any employment agreement with respect to payments the corporation must make in the event of termination.
Removing shareholders, directors, and/or officers demonstrates the importance of having a well-thought-out shareholder agreement or set of bylaws. With clear procedures in place, removing someone from a position often goes more smoothly. Without these documents in place, you may have to follow the governing laws in your state, which may not be ideal for your corporation.
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