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Divesting as a minority shareholder from an S Corp.

New York, NY |

I have 10% ownership in an S Corp in NYS. I wish to divest myself of all involvement with the company. What is the process? What paperwork do I need to file and with whom?

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Attorney Answers 3

Posted

You haven't told us whether you are an (a) officer or (b) director or (c) both? If you are any of these, you need to resign, in writing. Try to get an acknowledgment of your resignation. This is important because officers and directors can have liability for so-called "trust fund taxes," such as tax withheld from worker's pay. If you are not an officer, not a director and have no check writing authority for the corporation, you will be able to check off any concern about liability for trust fund taxes.

You haven't told us whether there is any sort of shareholders' agreement in place which might limit your ability to dispose of your stock in the corporation. If there is, or if the stock certificate has any sort of legend on it indicating it is restricted, you need to take the stock certificate and a copy of the agreement to a New York business lawyer and seek specific advice on the impact of the legend or agreement on your ability to divest yourself of the stock.

You haven't told us whether you want to receive some payment for your stock. If you do, speak to a New York business lawyer about formulating an offer to see the stock (1) to the corporation (2) to one or more of the other shareholders or (3) to a third party.

If all else fails, perhaps you can donate your stock to a charity. Since S corporations are only permitted to have natural persons as shareholders, donating the stock to a charity (which usually will be a corporation) can have a negative impact on the corporation's S status. This might be a reason the corporation, or one of the other shareholders would wish to purchase the stock (to preserve the S status of the corporation).

In Illinois where I practice, there is another option, where you can resign all offices and directorships and irrevocable give up your right to vote your stock, but still retain the stock itself. By doing this you would shed any fiduciary obligations as a shareholder (you might still have other fiduciary obligations). You could ask a New York lawyer if their law has a similar provision?

Good luck in your quest - this shouldn't be too hard with the assistance of an experienced business lawyer in New York.

Answering your question on AVVO, does not create a lawyer-client relationship between us. Under the rules of the Supreme Court of Illinois, or the rules of other jurisdictions, this answer may be regarded as advertising. Because questions provided on AVVO simply cannot contain a complete description of all the relevant facts, information contained in this answer should not be considered as individual legal advice or legal opinion. You are urged to consult an attorney licensed to practice in your State regarding your own legal situation.

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Posted

There are several different issues involved in divesting yourself of all involvement in the corporation. First, the resolution of some of these issues will depend on the state where the corporation was formed. For the purposes of this answer I will assume that the corporation was formed in New York. If that is not the case please update your question to let us know what state it was formed in; if the corporation was not formed in NY, then some of my answer will no longer apply.

On the subject of the question itself: as the other answer stated, if you are an officer, director, employee, or other agent of the corporation you need to immediately resign, in writing. That writing needs to be signed by you; signed and dated original should be sent to the corporation at its offices by certified mail, return receipt requested - make sure to write the certified mail article number at the bottom of the first page of your resignation letter - and I would suggest that you also send a copy of your resignation letter to the other shareholder(s), also certified mail, return receipt requested. This second is not required under the law (although you should check the corporation's by-laws to see if it is) but it is a good idea where a corporation has few shareholders just to make sure that no-one can claim they didn't know what was going on. Submitting a written, dated resignation is important because that will generally protect you from any liabilities that might be imposed on you because of your role as an officer, director, employee or agent of the corporation - the most common issue being so-called "responsible person" liability for the corporation's unpaid sales taxes and payroll taxes (if there are any that are unpaid).

If you have personally guaranteed any of the corporation's debts, you will have to review the terms of your guarantees carefully and, to the extent possible, revoke your guarantees if you can. If you cannot revoke any guarantees, then you will most definitely need to consult with an attorney with experience in these matters to advise you on the options available to you.

With respect to getting rid of your shares, if the corporation has any employees it may be very important to get rid of the shares because, under NY law, the 10 largest shareholders of a corporation can be held personally liable for unpaid wages. See NY Gen. Corp. sec. 630. You may also have continuing exposure to potential "responsible person" liability as a shareholder even if you hold no positions as an officer, director, employee or agent of the corporation.

To that end, the first step is to request that the corporation redeem them from you - that is, pay you something for those shares, at which point you would no longer own them - in your case, and depending on your relations with the other shareholders, you may have to accept a low-ball value for those shares; however, if you really want to be completely separated from the corporation taking a low-ball value may be a reasonable cost for protecting yourself. You could also approach one or more of the other shareholders to see if any of them would be willing to purchase your shares from you.

If the corporation will not redeem them and none of the other shareholders will purchase them, then you may have some additional alternatives that, however, may be more costly to pursue.

One option would be to dissent to the next major corporate action on which a vote of the shareholders is required and for which you have the right to demand payment for your shares if you dissent from the action (not all corporate actions give you this right; however, since the possible list of actions is long, I would suggest that you consult with local corporate counsel on the matter to find out which actions would give you the right to dissent and be bought out). Section 623 of the NY Gen. Corp. Law provides this right. As I am out of space, I would urge you to consult with competent local corporate counsel.

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Posted

If you are an officer, you will need to resign in writing and ask to be discharged of all duties. If you are a shareholder, then it is a bit more complicated than you think and you might need the assistance of a corporate lawyer.

Sebastien Gaddini is a Business Lawyer, licensed in New York and Paris, who has been working for top tier international law firms. Phone: 646-845-0411. Email: s.gaddini@gaddinistark.com. Website www.gaddinistark.com. This answer is for general purposes only and does not establish an attorney-client relationship.

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