The process of selling your shares back to a C corporation is governed by legal procedures that relate to corporate and tax issues. You are required to follow the provisions established by the individual C corporation, corporate governance laws and the Internal Revenue Service. It is important to follow these provisions when selling your shares back to a C-corp because they are meant to secure the authenticity of the share-sale transaction.
A stock redemption agreement sets advance terms for transferring your interests in the company, especially with regard to the conditions that govern the disposal of your shares when you quit the company. Therefore, you can trigger the share sale clause if you entered into a stock redemption arrangement with a C-corp at the time of the share purchase. The advance terms of the sale usually state the prices and tax responsibilities of each party involved in the share sale transaction.
Stock buyback is the main channel that a publicly traded company may use to repurchase your stocks. A private company may also approach you with an offer to purchase your shares. Take advantage of any stock buyback program that your the C-corp offers to offload your shares in the corporation. The stock buyback process is simple because the C-corp purchases your shares at market prices. All you need to do is visit the company’s appointed agents for the share repurchase program to authorize the sale of your shares. In some cases, a call for share repurchase may be compulsory, especially during a hostile takeover of a C-corp, or when the C-corp is withdrawing its shares from stock market trading.
In the absence of a stock redemption agreement or share repurchase program, write a letter to the C-corp expressing your desire to sell you shares. Make your share sale offer in the letter, indicating the number of shares you intend to offload and an offer price for the shares. Also provide a brief explanation for the decision to dispose of the shares in the company. However, this option would only be viable for a private C-corp because legal constraints may not allow a public company to respond to your offer.
Determine the tax impact of selling your shares back to a C-corp, depending on whether the sale results in a gain or loss. For instance, if you held the shares for a period exceeding 12 months, the proceeds of the sale are treated as a long-term capital gain or loss. However, provisions of some of the sections of the Internal Revenue Code, such as Sections 1202 and 1244, provide tax reprieves for the taxable sale of shares. According to the American Institute of CPAs, Section 1202 allows you to exclude a portion of the gain from the sale of qualified small-business stock that you have owned for more than five years. Section 1244 of the Internal Revenue Code, on the other hand, allows you to recognize a loss as ordinary instead of a capital loss, for purposes of claiming deductions.
Paul Cole-Ingait is a professional accountant and financial advisor. He has been working as a senior accountant for leading multinational firms in Europe and Asia since 2007. Cole-Ingait holds a Bachelor of Science Degree in accounting and finance and Master of Business Administration degree from the University of Birmingham.