QUESTION on How to Remove a Partner from a C Corporation
What are the steps and procedures to removing a partner from a C Corporation. This partner is both an officer and a shareholder. Thanks
– Dameon, MA
ANSWER by Chrissie Mould
As I am sure you know, a corporation is made up of shareholders, directors and officers. A corporation does not have partners, per se. So in order to address your question in the simplest terms, let’s think of the partner in question as two people: A shareholder and an officer.
First, you want to remove a shareholder. This is often easier said than done, because once shares have been issued to an individual (generally in exchange for money, services, or other thing of value), that individual becomes a shareholder. Period.
However, a shareholder agreement can play a critical role in determining if and when a shareholder can be “removed”. Depending on the provisions of such an agreement, there may be certain events such as a personal bankruptcy, divorce or disability that might trigger a forced sale of the shareholder’s stock in the corporation. If not, then the corporation might simply try to negotiate a buy-back of the shareholder’s stock.
Next, let’s talk about removing a corporate officer.
In a corporation, it is typically the board of directors that elects and/or removes corporate officers. A corporation’s by-laws define the procedure for removing an officer, which usually involves the calling of a meeting of the board of directors and removal of the officer by a majority vote of the board.
If there are no corporate by-laws, or if the by-laws do not address removal of a corporate officer, then the removal procedure outlined in the corporation’s articles of incorporation would be followed. If the articles do not provide for a removal procedure, then the corporation would look to state law–or, more specifically, the statutes governing corporations in the state of incorporation–for guidance.
For recordkeeping purposes, a board action removing a corporate officer would be documented via a signed board resolution or written consent.
The officer’s employment as an employee of the corporation may also (but not necessarily) be terminated along with his removal as an officer. If this is the case, be sure to review any employment agreement that may be in place, esp. with respect to any payments due in the event of termination.
Recommended Books on C Corporation:
- Capital Gains Tax Roll-over, Hold-over and Deferral Reliefs 2011/12
- 300 Business Deductions Available to C Corporations: List Of Over 300 Possible Deductions Every C or S Corporation Should Be Aware Of To Legally Minimize Their Taxes
- C-Corporations: Small Business Start-Up Kit (Small Business Start-Up Kits)
- LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less