When you start your corporation, you and your business partners probably get along well enough to work together, but problems often develop over time. For example, a shareholder might strongly disagree with the company’s direction but lack the influence to change it or want to get out of the corporation because of personal financial difficulties. As an independent legal entity formed under your state’s laws, your corporation can continue to exist even as shareholders come and go.
Unlike sole proprietorships and partnerships, corporate ownership is evidenced by owning shares of stock. For example, if you and three other business partners contribute equally to the capital costs of starting your corporation, you likely each own 25 percent of your company’s stock. Under state laws, corporate shares are the personal property of the shareholder, so they no longer belong to the company. However, the corporation, through its bylaws or other contracts, can control who is eligible to buy shares. For example, S corporations risk losing their special tax status if certain types of entities buy their stock, so their bylaws, or governing rules, may restrict stock purchases.
Forcing a Sale
Since shareholders own their shares as private property, they cannot be forced to sell or be prohibited from selling their shares if they wish — unless the corporation’s bylaws contain provisions directly affecting ownership or transfer of shares. Bylaws have the same effect as a contract when it comes to selling shares, so they are binding on shareholders. If the bylaws do not provide a way for a shareholder to sell his shares, he likely cannot be forced out of the company. However, if the shareholder also holds another role in the company, such as a position on the board of directors, he can be voted out of that role, thereby reducing his influence in the corporation. Losing his position might even encourage him to sell his shares and completely remove himself from the corporation.
A shareholder who wants to withdraw from the corporation can do so voluntarily by agreeing to sell or otherwise transfer his shares. Unless transfer is restricted by the bylaws, the shareholder can sell his shares to a third party, an existing shareholder or back to the corporation. Often, corporate bylaws address how stock is valued when a shareholder wants to sell his shares. If a shareholder is causing problems for your corporation or is becoming difficult to deal with but is willing to sell his shares, it could be in the corporation’s best interest to simply buy out that shareholder’s interest by purchasing his stock.
State laws and corporate bylaws make corporations responsible for keeping track of who owns their stock and in what proportion. Thus, any transfer of shares should be recorded in the corporation’s stock registry. The registry details the sales price for the stock, number of shares sold, and names and contact information for stockholders. A new shareholder must be treated like all other shareholders, even if he is not someone you know. For example, your corporation must give him an annual report, invite him to shareholder meetings and allow him to vote as described in your bylaws.
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