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Dear Julie:
As a small company with three owners, there is a natural tendency to
refer to fellow owners as partners...but an S corp is not a partnership. As
with any other corporation, the owners of an S corp are shareholders who own
company stock and have all the voting rights associated with the stock that
they own.
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The procedure for issuing shares of stock is relatively simple, as
discussed below. However, the real question is whether or not you really
want to transfer your own personal shares of stock to this individual. This
is not the way bringing on a new shareholder is traditionally done, and
doing so may have potential tax consequences (see a CPA for clarification).
Since the employee will presumably receive stock in exchange for services
rendered to the corporation, it would make the most sense to have the
corporation issue shares to him.
It sounds like your corporation does not currently have any corporate
shares left to issue, since the combined shares owned by the current
shareholders equal 100% of the corporation's total authorized shares. In
this case, what you can do is approve an increase in the number of total
authorized shares of stock and then approve and file an amendment to your
corporation's articles of incorporation with the secretary of state in the
state of incorporation to reflect the new number of total authorized
shares--and then issue shares to the employee. As you decide on the amount
of increase, consider that you may want to bring on additional shareholders
later and/or set up an employee stock option plan to entice new employees in
the future; that way, your pool of shares will be large enough to
accommodate these situations.
The number of issued shares does not have to equal the total number of
authorized shares of corporate stock. A corporation can have both "issued"
and "outstanding" shares. What matters is who owns the issued shares,
whether or not they are majority shareholders, and what their voting rights
are (in the case of an S corp, there can only be one class of stock, so the
voting rights would be the same for all shareholders).
The directors of a corporation are normally responsible for issuing
shares of corporate stock, so it is through a board resolution that you
would document the issuance of stock to your new employee in accordance with
your corporate bylaws. You might also issue a stock certificate as evidence
of his ownership of the shares.
As a reminder, S corps are subject to shareholder limitations; for
example, an S corp can have no more than 100 shareholders, and those
shareholders must be U.S. citizens or resident aliens.
Chrissie Mould
About the PowerHomeBiz.com Guide:
 Chrissie
Mould has over a decade of experience in business administration and
startup business consulting. She has helped launch companies in multiple
industries and has managed corporate administration and governance for
public and private companies. She is an incorporation specialist with
MyNewVenture.com LLC. The company provides low-cost incorporation services
to entrepreneurs and small businesses. Visit
www.MyNewVenture.com to form
a corporation or LLC.
The opinions expressed in this column are those of the
author, not of PowerHomeBiz.com. Users should not treat the Guide's response as
legal, accounting, or professional advice as all answers are intended to be
general in nature. Such advice can only be properly given by qualified
professionals who are fully aware of a user's specific geographical areas or
circumstances, such as an attorney or accountant.
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