How do we add a shareholder, ie - a Director of Operations, to our S-Corp? I am the President and, and my husband is the VP.

Asked almost 2 years ago - Charlotte, NC

We started out just the two of us. We would like to add someone as a shareholder and Director of Operations and Secretary. I am the President and Treasurer, My husband is the VP and Secretary. This person would also most likely be the Secretary from now on.

Attorney answers (3)

  1. John Michael Goralka

    Pro

    Contributor Level 7

    7

    Lawyers agree

    Answered . You have 2 options in adding a new shareolder. First, either or both of the current shareolders and sell some of their shares to the new investor. This is often not the preferred approach as this would be a taxable transaction for the existing shareholders. Second, the corporation may issue additional shares directly to the new shareolder. This would avoid a taxable transaction for the shareholders. If the buy in or subscription price paid by the new shareholder is paid in cash, then there should not be a taxable transaction to the corporation. If property is contirbuted, be certain that the income basis of the property contributed is greater than or exceeds and debt or mortgage secured by the property contributed. In California, a corporation with 3 shareholders is required to have at least 3 directors so an additional director may be required. The officers are elected annually by the directors. If the new shareholder is to be the corporate secretary, then the current secretary should provide a written resignation to the board. the board may then fill that vacancy with the new sharholder. You should also consider wny changes to the corprate structure prior to the admission of the new shareholder such as creating a second class of shares. For example, if you and your husband want to maximize your ongoing control of the corporation, then we may want tocreate a second class of stock and issue nonvoting shares to the now shareholder. nonvoting shares are even permissible in an S corporation. Finally, you should strongly consider a buy sell agreement to provide a way to remove the shareholder if he quits working for the corporation or if you no longer wish to continue that relationship. I typically will use a 5 year period for a buy out so that you and your husband can protect your corporation is the relationship sours later. Good luck with the continued growth of your business.

  2. Andrew Richard Edward Gale

    Pro

    Contributor Level 9

    6

    Lawyers agree

    Answered . Your first stop should be a meeting with your corporate attorney so you can be clear on what you want to do and understand all of the ramifications of your decisions. There may be unanticipated consequences, not the least of which is how you get rid of the new guy if things do not work out.

    Your question states that you want to add a shareholder which is another owner. You do that by selling the new owner shares in the corporation. The sale would be approved by a meeting of the shareholders. Check your corporate bylaws and shareholder agreements for any restrictions. Next, hold a meeting of the board of directors to elect the new secretary. Make sure that all of the changes are reflected in you corporate minutes.

    Good luck!

    IncorporationAttorney.com -- LEGAL DISCLAIMER: This answer is offered for informational purposes only. It does not... more
  3. Michael Charles Doland

    Contributor Level 20

    6

    Lawyers agree

    Answered . Mr. Gale gives very good advice.

    The first isssue is (1) issue new shares or (2) sell part of your shares. Consult your CPA on the big tax differences.

    Issuing or transferring shares is very technical and not do-it-yourself. You really need to have an ongoing business attorney.

    Finally, not your question, but every time two or more people not related by blood or marriage are in business togeher you need a "buy-sell" agreement to set a formula for the death, disability or retirement of an owner since there is no public market into which the shares can be sold.

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

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