Selling half of a corporation is different from selling half of its assets. Because your business is incorporated, you own shares in the corporation and the corporation owns the assets. For this reason, you must execute a share transfer agreement to sell your half of a corporation. A number of legal restrictions apply.
Corporate bylaws often have restrictions on share transfers. The most common restriction is called the preemptive right. If shareholders enjoy preemptive rights, you must offer your shares to each of the other shareholders, and each shareholder must decline your offer, before you can sell your shares to a non-shareholder. In some cases you must offer enough shares to each shareholder to allow that shareholder to maintain his current ownership percentage even after the sale. If you sell your shares to a non-shareholder, the terms of the sale must be no more favorable than the terms you offered the shareholders; you cannot offer a lower price, for example.
Under federal law, to offer your shares for sale, you must either register with the U.S. Securities and Exchange Commission or qualify under an exemption. Since registration with the SEC could cost hundreds of thousands of dollars, most people choose to comply with the terms of Rule 506 of SEC Regulation D. Under this exemption, you may sell your shares only to certain types of investors: corporate insiders, for example, certain institutional investors, or individuals that meet minimum net month or annual income requirements. You must provide these investors with enough information about the company to allow them to make an informed purchasing decision.
Share Transfer Agreement
To sell your shares, you must execute a share transfer agreement with the buyer. The agreement should clearly identify both you and the buyer, state the price and payment terms, specify how the buyer qualifies under SEC regulations, and identify how many shares are being sold. It should also specify the rights attached to the shares: the right to dividends, for example, or the right to vote. The agreement should also specify what representations and warranties are being offered to the buyer. For example, the agreement might make statements about the corporation's financial condition that, if false, would entitle the buyer to sue the seller.
The Special Case of S Corporations
An S corporation is a corporation that qualifies for special taxation rules under the Internal Revenue Code. S corporations generally do not pay federal corporate income tax, but must observe certain restrictions on their structure. If your corporation is an S corporation, it may lose this status if you sell shares to certain types of investors. An S corporation, for example, may not include shareholders that are corporations, partnerships or nonresident aliens.
Read More: What Is a Domestic Corporation?
- U.S. Small Business Administration: Selling Your Business
- U.S. Securities and Exchange Commission: Rule 506 of Regulation D
- EquiCap Partners, LLC: How is the Acquisition Purchase Agreement Structured?
- VC Ready Law Group, LLC: Anatomy of a Term Sheet: Right to Maintain Proportionate Ownership (a/k/a Preemptive Rights)
- Internal Revenue Service: S Corporations
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.