Transferring Ownership in a Corporation

Transferring Ownership in a Corporation

Corporations are one of the easiest corporate structures to transfer ownership in. This is the case whether the ownership is part of the company or the whole company. Below we discuss transferring ownership in a corporation and specific guidelines for S-corporations and C-corporations.

Determine Regulatory Guidelines

The first step in transferring ownership in a corporation is determining if there are any state regulations that require documentation of the change. If no specific names are stated in the Articles of Incorporation, changes can be reported in the annual report. However, if the state does have names recorded, a Certificate of Amendment will need to be filed with the state to change the names of the shareholders.

Review Shareholder Agreement

The next step is reviewing the shareholder agreement. A shareholder agreement is simply a contract that binds, restricts, and/or limits shareholders actions. In this agreement, there are often provisions on share transfers. These provisions protect the business by allowing the remaining shareholders to select new shareholders. It can also help prevent new prospect shareholders from taking over the business.

While there cannot be rigid restrictions on selling ownership, generally if a shareholder wishes to sell their shares of the business, they must first offer the shares to peer shareholders of the business. If neither the business nor any other shareholder wishes to purchase the stock, it is then offered to outside investors.

When transferring ownership, you will then draft a new shareholder agreement with the details of the share or stock transfer to the a new owner. In addition to this, you will need to issue new shares of stock to the new owner.

Obtain a Business Valuation

An important piece of transferring ownership in a corporation is determining the value of the stock. In public companies, the value is simply the going market rate. In private companies, an independent, third-party valuation firm will value the stock. Peak Business Valuation is a leading business appraiser in Utah that is happy to help determine the value of your corporations’ stock. Once the analyst determines the value, the corporation can then distribute or redistribute the shares of stock.

Receive a Stock Certificate

The last step in transferring ownership in a corporation is issuing a stock certificate to the new owner. This is a hard copy document detailing ownership of the stock. Every owner of the corporation should have documentation of their ownership.

C-Corporations

C-corporations are what most people think of – the big businesses of America. Despite that they are the biggest and most complex busines structure, they are usually the easiest to transfer ownership in. This is because the ownership lies with the shareholders – also known as stockholders. Individuals are given stocks or shares in exchange for ownership in the company.

C-corporations have no legal limit on the number of type of shareholders. As such ownership percentages are based on the number of shares one owns. In a public corporation, these percentages constantly change due to stock trading. The value of the stock is determined based on current market rates.

Whereas in a private corporation, ownership transfers happen less frequently. Shares may have to be held for a year prior to being publicly resold. Whenever sales of ownership are sold, the current value will need to be established to determine the price of the stock. A valuation firm, like Peak Business Valuation, will typically perform the valuation.

To transfer ownership in a C-corporation, all you need is a sale of stock. Owners are usually free to buy and sell shares of stock. But sometimes the Shareholder Agreement or Corporate Bylaws may have certain restrictions. For instance, the shares may need to be offered to existing shareholders first.

The transfer of ownership is official when the new owner receives a Stock Certificate. This is a hard copy document giving evidence of who owns the stock. Post transfer, the seller will report any capital gains on stock sold.

S-Corporations

Unlike C-corporations, S-corporations have restrictions to the number and type of shareholders. The main differences being that an S corporation cannot have more than 100 shareholders. If so, it loses its S-corp status and becomes a C corporation.

The other main difference is that all income and expenses are passed through to the owners without being taxed at the corporate level.

S-corporations often have bylaws restricting who can receive shares. To transfer business ownership, the corporation must first value the shares and then draft a sales agreement detailing the distribution of money and shares. In most cases, a third-party will value the stock before the ownership transfer.

The business must also file a Schedule K-1 tax form to reflect each member’s share of profits and losses for the part of the year up to the ownership transfer date.

Summary

Before transferring ownership in a corporation, it is best to consult both your legal attorney and financial advisor. They will be able to assist you with the legal and tax implications of transferring ownership. They will also know the specific regulations and steps for transferring ownership for your specific corporation and circumstance.

Peak Business Valuation, a business appraiser in Utah, is here to help value stocks or shares for ownership transfers. We are happy to answer any questions you have. Please reach out via email or by scheduling your free consultation below.

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