An S-Corp with 4 shareholders was started this year (2009). Today, one of the shareholders wants "out". He no longer wants to be affiliated with the company and wants to sell his shares back to the company.

What steps need to be taken to allow the shareholder out of the company?

My main questions are:

  1. How would one determine the value of the shares?

  2. What (if anything) do we need to tell the IRS and state?

  3. I'm assuming a contract needs to be drawn up for all the shareholders to agree to. Are there any online resources for this such as a template website or is a lawyer the best way to go on this?

asked 20 Oct '09, 03:10

TaxQueries's gravatar image

TaxQueries ♦♦
accept rate: 2%

Your financial statements will produce the actual value of the stock at the date of sale. The shareholder still needs to file a tax return showing his interest in the corporation up to the sale date and then the corporation needs to take back the stock at fair market value from him.

You should record this in the minutes of the meetings and have him surrender his stock certificate at the date of sale.


answered 20 Oct '09, 14:30

SandySea's gravatar image

accept rate: 7%

The fair market value of the exiting shareholder's shares is based upon the fair market value of the corporation's assets less liabilities multiplied by the exiting shareholder's ownership percentage.

The exiting procedure is either for the other three shareholders to acquire the shares, or have the corporation redeem the shares. If the corporation redeems, they can either be retired, or held as treasury stock for reissuance for consideration at a future date.

If the other three shareholders acquire the shares, they will also need to track their tax basis in their shares, and will in part be "inside" basis from the corporation and part "outside" basis for the part acquired from the exiting shareholder.

In determining the allocations of tax attributes, the corporation can either elect to do a closing of the books effective as of the date of transfer, or can close the books as normal for the calendar year and pro-rate the tax attributes according to the # of days in the period with four owners and the period with three owners. However, whichever is chosen, the corporate resolution, redemption, or buy-out agreement should recite this issue.

If there are no extraordinary non-recurring income or expense items in either period, pro-rata will most likely be fine, but the shareholers need to agree by resolution. Also, the corporate resolution should contain authorization for the entire transaction and be in accordance with the bylaws and shareholder agreements.

Even if there only a few extraordinary non-recurring income or expense attributes in one period, or the other, the pro-rata method can still be utilized by allocating the non-recurring attibutes only amoung the appropriate shareholder group (either four shareholders or three shareholders) for the respective period.

Additionally, the shareholders should retain legal counsel unless they feel comfortable handling everything themselves which will insure that the proper documents and resolutions are signed.

There is no special IRS filing except Form 1120-S after the end of the year, and depending what State is involved, may or may not require a filing with the Secretary of State's office, and is why legal counsel should be retained.

Another thing to keep in mind is that the "Accumulated Adjustments Account", which is really "tax basis retained earnings", is a "corpoate" level account, and to the extent that the exiting shareholder does not receive his full share of earnings through the redemption date, will contain that remaining balance as reported at the end of this year and subsequent years in Schedule M-2.


answered 20 Oct '09, 23:13

Brent%20Berkman's gravatar image

Brent Berkman
accept rate: 13%

Whoa!!! I think before you determine the share price etc., you need to determine whether the Corporation is required to redeem the shares or the shareholders acquire them. There is generally no difference between a C corp and an S corp other than filing a Form 2553 which as we all know flows items of income, expense, gains and losses to the shareholders' personal 1040.

So, therefore, when there are multiple s/h's as in this case, I think you need to refer to the laws in the state of incorporation as to what the corporation is required to do before they "cash" out the s/h (I use the word redemption, redeem, for whatever transaction is used to cash out the s/h). Do they ned to vote on it, what % of yes votes is required, what are the mechanics, is ita shareholder resolution, redemption, etc.?

The reason I would be cautious if you don't dot all the iiii's and cross the tttt's and then say the corporation redeems the shares of shareholder based upon one of the formulas referred to above. Let's say that shareholder 1 is redeemed then, say for par value at the eoy 1. Then the corporation goes belly up in year 2. Then you may have lawsuits all over the place for not following all the corporate niceities, shareholder 1 got too much, etc. On the other hand, maybe the corporation needed the money and the redemption caused bankruptcy. That's right, "here comes those hungry sharks, up from the bottom for another bite."

I believe that one of the answers referred to talking with an attorney, but unless you are a practicing attorney, quite familiar with corporate law, that should be the first call in my opinion (speaking as a CPA, of course). Not trying to make attorneys rich. I just don't wan't to go poor.

Also, if the corporation redeems shares in the ransaction, I believe a 1099 B may be required to be filed by the corporation.


answered 26 Oct '09, 22:05

jim's gravatar image

accept rate: 5%

Thanks for providing some additional considerations, which are why I recommended to consult an attorney, although maybe not strong enough!

(27 Oct '09, 02:45) Brent Berkman

Admitedly I'm not strong in this area, but in the real world book value and the value of shares of the selling shareholder of that business are two entirely different things.


answered 27 Oct '09, 02:34

beze's gravatar image

accept rate: 0%

A good poker player can even turn these signals around and use them against the other players, giving away a "tell" that would usually signify a bad hand when the opposite might be true - tricking the other players into betting high with the impression that you have a bad hand.

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answered 08 Nov '10, 14:13

Corinne's gravatar image

accept rate: 0%

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Asked: 20 Oct '09, 03:10

Seen: 7,027 times

Last updated: 08 Nov '10, 14:13