How to Remove a Partner in an S Corporation Business

September 26, 2005 | By | Reply More

QUESTION on How to Remove a Partner in an S-Corporation

I have an S corp (with 2 original incorporators). I want to “buy out” or actually remove 1 of the incorporators and keep the business. Do I file “Restated Articles of Incorporation”? Thanks

– Deanna H. (Michigan)

ANSWER by Chrissie Mould

Dear Deanna:

Let’s be careful not to mix apples with oranges. An “incorporator” is simply the person or entity who is listed on the Articles of Incorporation as having formed the corporation. Once the corporation has been formed there is no way to remove the incorporator, per se, because it is a done deal.

If the incorporator happened to be a shareholder and your question really pertains to removing a shareholder’s interest in the S corp, the answer will depend in part on the terms of the shareholder agreement, if one is in place. A properly drafted shareholder agreement will usually address the issue of a buy-out of another shareholder (esp. by a majority shareholder or the corporation itself) and what approvals (ie. majority shareholder approval, board approval, etc.) and restrictions might apply to the transfer of shares. In the absense of a shareholder agreement, one would refer to the bylaws which govern the corporation to determine the method by which the shares would be transferred in accordance with the statutes governing corporations in the state of incorporation.

Once the necessary approvals are in place, it generally becomes a simple matter of effecting the stock purchase, canceling the former shareholder’s stock certificate and noting the transfer of ownership in the stock transfer ledger which is kept as part of the corporate records. And speaking of corporate records . . .

In small corporations it is not uncommon for individuals to wear multiple hats, playing the role of a shareholder as well as a director and/or officer. The departing shareholder may also be a director of the corporation and, if this is the case, his/her removal as a director would need to be effected separately in accordance with the corporate bylaws and documented via a shareholder resolution (shareholders elect and remove directors in a corporation) which is to be kept on file with the corporate records. The Articles of Incorporation usually do not list the shareholders of the corporation, but they may list the initial directors. If desired, the Articles of Incorporation may be amended or restated–also subject to shareholder approval–to omit the name of the former director.

If the departing shareholder is also an officer of the corporation, you will need to put on your hat as director of the corporation to remove him/her as an officer, as it is the board of directors that elects and removes officers in a corporation. The removal of a corporate officer would therefore be documented via a board resolution.

And with that, your corporate records book just got fuller.

Chrissie Mould

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Chrissie Mould

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 LLC. The company provides low-cost incorporation services to entrepreneurs and small businesses.

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Category: Business Structure, Q & A

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