How to Remove a Shareholder From an S Corporation

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An S corporation (also commonly known as a Sub Chapter S corporation) is owned by one or more shareholders. If the time comes to remove a shareholder from the S Corporation, the corporate code (set of laws governing corporations) in the state where the business was established sets forth the procedure for eliminating that shareholder. The process to remove a shareholder from an S Corporation consists of a number of steps, all of which must be completed to ensure a lawful elimination of that stock owner.

Step 1

Prepare a resolution to present to the S corporation board of directions. The resolution need not be a complicated document. Set forth the date of the board meeting and a paragraph that "resolves" that a particular shareholder be removed from the corporation. The resolution needs to set forth a provision approving the purchase of the shareholder's stock. (A shareholder is removed from an S corporation through the purchase of his stock.) A signature block is included for the corporate secretary.

Step 2

Schedule a meeting of the board of directors.

Step 3

Present the resolution to the board of directions.

Step 4

Take a vote of the board of directors. The resolution passes with a majority vote of the board of directors. If the resolution fails, the individual remains a shareholder of the S corporation.

Step 5

Issue a payment to the shareholder to be removed purchasing her shares of stock in the S corporation.

Warnings

  • A shareholder may refuse the payment to purchase her shares. If that occurs, the corporation needs to place that amount of money in an escrow account until the matter with the shareholder is resolved.

Tips

  • Consider engaging the services of an attorney to assist in the removal of a shareholder from an S Corporation, particularly if the stock owner disputes the removal. Although these groups cannot make specific recommendations about an attorney, both the state and local bar associations maintain directories of attorneys that practice in the business and corporate law arena. Contact information for these organizations is available through the American Bar Association.

References

  • "Practical Guide to S Corporations;" Michael Schlesinger; 2007
  • "Corporations: Examples & Explanations;" Alan R. Palmiter; 2009

Resources

About the Author

Mike Broemmel began writing in 1982. He is an author/lecturer with two novels on the market internationally, "The Shadow Cast" and "The Miller Moth." Broemmel served on the staff of the White House Office of Media Relations. He holds a Bachelor of Arts in journalism and political science from Benedictine College and a Juris Doctorate from Washburn University. He also attended Brunel University, London.

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