Allocating S Corp shares to a new member

1 : My s corp is 5 yr old small business with 2M revenue. Me and my wife are currently holding 50/50 shares. We would like to invite one of our employees into the managing board of directors by offering 30% share. What is the best way to do this? Do we have to sell our 15% portion at a price ? 

2 : How the share value is calculated ? Can we offer these shares as a bonus or a pay ? 

3 : Will the new person need to pay tax when she receives the shares of S corp on paper ?

Answer :

1 : I guess the first thing you need to do is contact your attorney & your CPA/ an IRS EA;the sale of the shares in your S corp will require the corp sec to issue a new stock certificate to the new owner & cancel the old one.When preparing the S corp tax return, the transfer of interest will consist of the income being allocated on the k-1. The corporation files an 1120S with the appropriate K-1 forms to report the net profit and/or loss to the shareholders during the year. If you sell your shares in mid-year you and the other shareholder will EACH receive a K-1 reporting your respective shares of net profits (or losses) for the year. There are two different ways to do this, so consult a CPA or IRSEA familiar with "S" taxes, ~~~before~~~ you go to the attorney to draw up the sales agreement, as it should be stipulated in the documents how this get handled.

NOTE : an owner of an S-corp might wear two hats. One is as the owner of the business, entitled to receive a share of the net profits of the business. Oftentimes, the owner will also work for the business, and thus be an employee of the firm. Thus an owner-employee of an S-corp can receive two different types of income: net profits (or losses) and salary income. Assume that , In 2012, the corp shows net income of $300K as wages, paid to you as salary and bonus. Instead, you could pay yourself $210K salary($300K-$90K(30% of the net profit was sold to the employee), then you need to pay your Soc Sec taxes on $210K as employees/owners as long as you can demonstrate that's comparable to other top executives' earnings at similar companies. The remaining $90K balance ($300K minus $210K)sold to the EE is taxable to the EE as corporate earnings on his tax return. By shifting the $90K from earned to unearned income, you would save $9,360 for FICA tax and $2670 in Medicare tax, assessed at 2.9 percent for employer and employee.However, profit distributions are not subject to FICA payroll taxes; they are subject only to the shareholder's income tax rate. So all things considered, you, as the shareholders-employees, will have a strong preference to pay yourselves a minimal salary and thereby increase the profit distribution on your Sch K-1 of 1120S..

2 : As mentioned above.I guess you need to contact yur CPA/ IRS EA for more accurte info in detail.

3 : An S corp operates a pass-through entity, meaning all corporate income and deduction items pass through to shareholders, who then report those amounts on their personal returns. He owes personal income tax on his share of S corp profits. So as long as you run your business as an S corp, you may consider giving away some shares to low-bracket relatives, including your children, who'll owe less income tax. Share giveaways also can reduce your payroll and estate taxes.

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