Corporations use shares of stock to determine ownership interests. Having an ownership interest in a corporation grants certain rights to the holder of the stock, including the ability to have a certain amount of say in the management of the business -- voting rights -- and the right to receive a certain amount of the ownership profits based on percentage of ownership. Owning stock in an S-corporation raises some interesting issues, including whether you can gift the shares away.
Whenever someone purchases shares of stock, that person receives an ownership interest in the particular corporation. In general, there aren’t any restrictions to gifting away the stock -- it’s treated as the holder’s property and the holder is free to do with it as he pleases. Some tax matters may arise, however -- especially when the stock was purchased at a price that varies from its fair market value. The general tax rules apply to gifts of S-corporation stock, but holders of S-corporation stock have other issues to consider in addition.
An S-corporation is a very specific type of corporate entity. Like other corporations, S-corporation ownership is evidenced by stock and holders of the stock may be entitled to voting rights and rights to the corporate income. However, because an S-corporation is a very specific type of business entity, regulated by the Internal Revenue Code, giving away S-corporation stock isn’t as easy as giving away standard, C-corporation stock. The original owner and the intended beneficiary must consider both the relative limitations of the S-corporation form and any other restrictions in the shareholder agreement.
Issues with Gifting S-Corporation Stock
The Internal Revenue Code sets forth specific conditions for a business to operate as an S-corporation. The most current requirements as of the date of this article require that S-corporations contain no more than 75 shareholders, each of whom must be US citizens and individuals. Certain rules allow for immediate family members to act as one shareholder, but if an owner of S-corporation stock wishes to give away that stock, problems may arise if doing so would cause one of the requirements for S-corporations to become invalid.
In addition to avoiding negating the specific requirements of an S-corporation, the closely-held nature of the company may have restrictions on stock transfers that are set forth in the shareholder agreement. Shareholder agreements may restrict transfers of stock because transfers can disrupt the ownership and voting structure, which can be detrimental for smaller organizations. Shareholder agreements for S-corporations may require consent from the other shareholders to ensure any new members would act in the best interests of not only the corporation, but the shareholders as well.