Changes in the ownership of S Corporations are governed by shareholder agreements. While all corporations with multiple shareholders should have shareholder agreements in place, often many corporations do not have one. Shareholder agreements spell out the terms and conditions under which shareholders may buy, sell, or transfer their shares in the corporation. Transferring the ownership in an S corporation is accomplished by one party selling shares to another. Generally speaking, without a shareholders agreement in place, shares can be freely purchased or sold without restriction.
Step 1
Consult a certified public accountant. In order to change the ownership of a corporation, shares must be sold from one party to another; for a sale to occur, there must be a financial value associated with the transaction. In arms length transactions, the buyer and seller often perform valuations of the shares to determine the purchase price. When closely related parties are changing the ownership of a corporation, a CPA should be consulted to ensure that the transaction uses a fair market value purchase price that could be supported in the event of an IRS audit.
Step 2
Draft a purchase agreement (see Resource). Once a purchase price has been decided on, a purchase agreement should be drafted that outlines the number of shares being sold and the effective date of the sale. Purchase agreements can also be used to finance the sale and attach additional terms and conditions to the transaction, such as covenants not to compete.
Step 3
Transfer the share certificates. Once the transaction has closed, the selling party should deliver share certificates to the buying party evidencing their ownership of the shares. The corporation also will need to update its record book to reflect the change in share ownership.