How to Transfer Shares of Stock Within a Corporation?
Knowing how to transfer shares of stock within a corporation is important for business owners. The ownership percentage is determined by the shares.3 min read
2. Transferring an S Corporation's Shares
3. The Stock Transfer Ledger
Updated July 8, 2020:
Knowing how to transfer shares of stock within a corporation is important for business owners. A person's percentage of ownership in a company is determined by the shares they hold. The respective shares can be sold or given by their owners however they see fit, as long as it complies with the shareholder agreements they signed prior to the transfer.
Shares can be transferred through different types of business entities, such as corporations, partnerships or limited liability companies. Each entity has a different share structure, share transfer guidelines, and maximum number of shareholders.
Most companies have share transfer guidelines and written agreements between owners, clearly specifying how the share value is calculated and who may or may not own shares in that respective company. Although all corporations should have these agreements, not all of them do.
If such an agreement does not exist, a person must realistically value its stock before transferring it, in order to comply with IRS rules and state corporation laws.
Once the presence or lack of an agreement is determined, a purchase agreement needs to be created to complete the share transfer. This document clearly outlines all the details regarding the transfer. Once this legal document has been signed, the share certificates need to specify their new owner's name.
Transferring an S Corporation's Shares
An S corporation is a business that complies with a specific set of regulations to benefit from a special tax regime offered by the IRS. One of the most important regulations includes a restriction on who can own stock in the company. Not complying can mean losing tax privileges.
Any well run S corporation should be careful to restrict stock transfers in order to avoid accidentally transferring stock to an ineligible party and therefore losing the special tax status. In order to transfer stock properly, there are several steps that need to be taken:
- Find out if the S corporation has a shareholders' agreement in place
- Determine the correct price for the stock. If an agreement is in place, it may specify the price you can charge for your stock. If there is no agreement, you will need to determine the company's total value and determine the price of your stock based on what percentage of the entire company your shares represent.
- The next step is determining whether the party you wish to sell your shares to is allowed to own stock in that company. Shares in S companies may only be owned by citizens or residents, or by certain entities, not including partnerships or other corporations.
- A sales agreement must be drafted, clearly specifying the parties involved, the price of the stock, and how much of it will be purchased.
- Another important clause in the sale agreement is the buying entity agreeing to fully respect the S corporation's internal laws and shareholder agreements already in place.
- Finally, both parties need to sign the document and keep a copy for tax purposes.
- If all steps are properly taken, the company's board of directors will acknowledge the new ownership of the respective stocks and document the date, price, and other details of the transaction.
The Stock Transfer Ledger
An important document for any corporation is the stock transfer ledger which effectively keeps track of all details regarding the institution's shares and their owners. Such a document often includes the following clauses:
- The name of the initial owner of the shares
- The initial owner's address
- The exact date when they became shareholder
- The certificate number for their shares
- How much stock they own in the company
- How they initially obtained the shares
- Details regarding the sum of money paid for the shares
- The date when the transfer occurred
- Who the new owner will be
- How many shares there are in total
- How many shares exist outside the respective transaction
- Amount of taxes due following the transaction.
The ledger is useful for any action regarding the shares, such as sale, transfer, or loss. Due to its obvious importance for a corporation, the ledger is kept by the corporation's secretary, along with other crucial documents like the corporate seal.
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