Stockholder Leaving Stock Sale

[geekgirldany]

I have some clients coming by tomorrow that are moving a s-corp from another state to georgia. Anyways, Shareholder A is going to buy out Shareholder B. I don't have any details on how they plan to do this. If shareholder B will just leave or if S/H A will buy his shares.

I just want to make sure I have this straight in consulting them. Shareholder A will buy out Shareholder B's shares. They need to setup the deal with a lawyer. Shareholder B reports sale of stock on individual return. The S-Corporation will do a short year election where the year is treated as two separate years.

I also wanted to ask if the corporation can buy back its shares from shareholder B.... is this possible? If so, this would reduce the shares outstanding correct? I thought that might come up.

I did the short year election with another client last year. Just wanting to make sure I have covered everything before talking to these clients.

Thank you for reading.

[erchess]

Reaction

1. As you noted the short year process is an election and remember that you must have signed consent of all shareholders to do it. I think doing it is the best option for all concerned.

2. They both need lawyers if they want to spell out what they will do in the event that there is a legal or tax controversy involving the period of joint ownership. If they are content to leave that to law in the old State then they shouldn't need any help filling out the transfer of ownership lines on the backs of the stock certificates.

3. I'm sure we all understand how B's return will look.

4. I don't see any reason to run the sale through the Corp. Why would it even be material to anyone? It looks like to me any way you slice it B's transaction is not affected, A has an increase in his basis equal to what B got and if you run things through the corporation there are entries to be made on its books that change nothing I'm aware of in the lives of the owner or the former co owner.

[geekgirldany]

Thanks so much for answering. I just wanted to make sure I had it covered before meeting with them.

[Snaggletooth]

Domiciled Corporation

Where I would stop short would be the "moving" of the corporation from one state to another, as this is more involved than just moving individuals.

I'm sure most states have a provision to do this, and one of the prerequisites would be that the corporation be certifiable as a corporation in good standing in the former state. This means no delinquencies, unfiled reports, etc. With dramatic ownership changes, your client might consider simply applying to the Georgia Sec of State as a new corporation.

[geekgirldany]

Thanks Snag. Well I told them to keep the existing s-corp. and not to do a new corporation.... for federal purposes. They were wanting to close it down and then the new shareholder start a new s-corp. I thought it would be best just to do the sale of stock. Since the assets are in the corporation's name, insurance, and contracts, etc. Just to keep it going and dissolve the alabama corporation and then register with Georgia for a new corporation. Same name they will just be getting a new corporation in Georgia.

I told them to get a lawyer to dissolve the other state corp. and they could get him to do the Georgia. The new shareholder said he would prefer me do the georgia corporation filing. I do this as a secretarial service for customers since it can be done online. I also advised them to get a lawyer involved per the sale of the stock but they want to do it themselves.

So hopefully I advised them correctly. I did tell them I was not a lawyer and could not give legal advice.

[veritas]

i think you best

Seek advice. If you dissolve the corporation in Alabama you have terminated the corporation for federal purpopses as well.

[geekgirldany]

Thank you Verties.Yes there appears to be a great deal more to it than I thought. I just did a little more research and it appears that there will have to a reorganization to avoid it being terminated on the Federal level as well. I just emailed one of them and highly recommended they go to a lawyer.

I really thought it would be more simple... and thought i knew what I was doing.