Giving away a majority % of an s corp in exchange for a % of the net profit

Asked over 2 years ago - Santa Cruz, CA

I own a s corp, i have allowed two people to make over and run the business without any legal standing up to this point. The discussed deal is for me to give a 40% share to each of my partners who also work and manage the business while i would retain a 20% share and 20% of the net profits. i have brought to the table the lease the licenses the permits, the place of doing business. I am concerned that after this give/take i will have lost my rights to my 20% of net profits

this is in CA, i am wondering if i should retain 50% of the business and just give away 80% of the profit?

Attorney answers (4)

  1. Michael Charles Doland

    Contributor Level 20

    7

    Lawyers agree

    Answered . What you need is an attorney you can discuss the detailed facts with and come up with a comprehensive strategy, such as what happens if they don't perform (about regaining your shares) and what happens if they perform improperly subjecting the company to liability. You either need a shareholders' agreement or other type of contract. Part of the advantage to having your own counsel is considering questions you may not know to ask. Your facts don't indicate sufficient facts to give you anything approaching a secure agreement, and the financial aspects you inquire about are impossible to answer in the abstract. My personal preference is to give away 0% of the shares and X% of the income, defining income very, very carefully. There are great business attorneys on Avvo near the Santa Cruz area. You may also contact our office via my Avvo profile.

    The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may... more
  2. Jeremiah Kent Jarmin

    Contributor Level 12

    6

    Lawyers agree

    Answered . You have a number of options at your disposal and you should consult with a corporate attorney in your jurisdiction. Optimally, as mentioned above, giving up equity should be a last resort. There are a number of ways to compensate people that work for your business whether they are employees or independent contractors in a manner that could resemble a stock option plan but in reality is just a cash bonus (e.g. phantom stock). Speak with a knowledgeable corporate attorney in your jurisdiction about the best plan of action.

    The aforementioned opinion does not constitute legal advice and is for informational purposes only. See an... more
  3. Kenneth Allyn Sprang

    Contributor Level 15

    6

    Lawyers agree

    Answered . With the caveat that there are doubtless many facts not laid out here, this sounds like a very bad idea. If I understand correctly, two people have been running the business. At the moment you own 100%. The plan has been to give each of the other two 40% of the business with ou retaining 20% of the equity and 20% of the profits. In my view, absent several modifications, this is potentially a disaster waiting to happen.

    The threshold question is what are you trying to accomplish? Why are you giving away 80% of your business? Are you seeking to segue out of it or are there other factors. If you are looking to reward good work, there are better ways to do it. By giving away 80% you lose control of the company and you will be at the whim of the others. You can protect yourself somewhat through a shareholders' agreement or the like, but I do not think this is a wise path, regardless of your end goal.

  4. George William Wolff

    Contributor Level 13

    4

    Lawyers agree

    Answered . There are a number of ways to do this.

    Since your are an S Corp the profits are typically distributed in proportion to share ownership, so you might not want to give/transfer an 80 percent share to them.

    Giving them a supermajority share would also allow them to control the business, and maybe force you out or dillute you ownership share, unless you have a good shareholders agreement to protect you.

    Other options might be to retain majority ownership, but provide for bonus compensation to them if certain profit levels are maintained.

    Or you might be able to have two classes of stock, but this could affect possibly your S Corp status.

    Another concern is whether the change in ownership might affect your lease.

    If you are giving up control of the company you also might not want to be the only person liable on the lease.

    You usually don't just "give" someone shares, but you grant or transfer shares in exchange for some consideration, whether it be money, services, etc.

    Giving them something could result in gift tax liability, depending on the amount of the value of the shares exchanged.

    There could be other tax issues.

    What kind of licenses are involved here?

    Some licensing agencies require notification or approval of changes in the identity of the persons doing business under the license, and failing to do so could affect the license.

    Please give us a call if you would like to discuss these and other issues in greater detail.


    George Wolff

    WOLFFLAW.com
    San Francisco CA
    (415)788-1881
    Ext 222.

    This is NOT legal advice, just a general discussion of the law, as we are not familiar with the specific... more

Can't find what you're looking for? Ask a Lawyer

Get free answers from experienced attorneys.

 

Ask now

28,871 answers this week

3,175 attorneys answering

Ask a Lawyer

Get answers from top-rated lawyers.

  • It's FREE
  • It's easy
  • It's anonymous

28,871 answers this week

3,175 attorneys answering