Discussion:Sub S and the dissenting minority shareholder
From TaxAlmanac
Discussion Forum Index --> Consumer Questions --> Sub S and the dissenting minority shareholder
| 25 March 2009 | |
| I have a client that has a close corporation and they have been operating as a C Corp and now want to elect Sub S in order to avoid double taxation for a forthcoming liquidity event...but one minoirty shareholder who own .4 of 1% refuses to sign the 2553....what in gods name can we do? | |
| 25 March 2009 | |
| Kind of a legal question but reminds me of the old adage about partnerships "either we all agree or nothing happens". Unless you have judicial intervention. Just my .02 | |
| 25 March 2009 | |
| All shareholders, no matter how small, must consent. Options are staying as a C Corp, convincing the minority shareholder to change their mind, buying out the minority shareholder, closing down the C Corp and starting a new corporation without the minority shareholder. | |
RoyDaleOne (talk|edits) said: | 25 March 2009 |
| Do a reverse stock split and the minority shareholder will go away. Just make sure the attorney does everything legal and above board. | |
| 25 March 2009 | |
| How would he go away? He wouldn't own 0 shares. You'd still have to pay cash for his partial share. | |
RoyDaleOne (talk|edits) said: | 25 March 2009 |
| A reverse stock with cash in lieu for fraction shares will make 0.4 of 1.0% go away. You don't get the complete instructions for nothing. | |
| 25 March 2009 | |
| What part of the country are you in? I think if someone could just reason with him, the matter could be solved. Examples from fiction might be: have a car barely graze him as he walks down the sidewalk, pour turpentine over his prize fern or African violet, how about 3 cans of octane boost in the gas tank (I've seen this blow an entire exhaust system off, with no permanent injury to the driver).
Of course, I cannot (and do not) suggest any of these things, I am just pointing out what some writers of fiction have imagined to be solutions to the problem. | |
| 25 March 2009 | |
| My question was basically why not just buy him out straight-up instead of paying an attorney to do a reverse stock split and paying him cash in lieu? | |
| 25 March 2009 | |
| I don't need the complete instructions because (A) I'm not doing it and (B) I've done it before. I think it's unnecessarily expensive. | |
| 25 March 2009 | |
| even if bought out...all shareholders of record in the year of the election must sign...so u r telling me that 99.6 is not enough,,,,sheeesh,,,,can we sue the shareholder for our double taxation liabilty? | |
| 25 March 2009 | |
| Right. Could elect next year though. Alternatively, paying him a premium on the buyout might convince him to sign. Could even agree to make the election to close the books as of the buyout date, so future (in this year) transactions wouldn't affect him. (S Corp would file two 1120S's) Seems odd to me that he won't sign. I wouldn't imagine 0.4% would affect his personal return much, but I'm sure he has some reason...
Can't sue, unless shareholder previously agreed to convert the corp into an S Corp. In such a scenario, it would seem to me like you could sue for breach of contract for the actual damages, but even then I'm not sure, I'm not an attorney. Pre-incorporation agreements between shareholders before filing any corporation papers can spell out that all shareholders wish the corp to adopt S election status, and that they will all sign Form 2553. Avoids a scenario like this. | |
| March 25, 2009 | |
| Just another reason to limit severely the number of shareholders. | |
| 8 October 2009 | |
| And don't forget wives must also sign that 2553 if stock is owned jointly or shareholder lives in a community property state.
OP mentioned upcoming liquidity event - don't forget built in gains tax will apply to conversions from C to S! | |
