How to Transfer Ownership of a Corporation
Q: Our parent company has been acquired by another company, now owning 100% of the shares, and there will be new directors on the board, as well as CEO, CFO etc. Is there anything that needs be done pro-actively related to this or is it sufficient to just name the new officers when filing annual reports?
Thank you to a client from California for that great question! To answer our client’s question, when transferring ownership of a corporation, you will need to update your officers and directors, either by filing Articles of Amendment or on your annual report. Since ownership of a corporation is determined by ownership of stock, transferring ownership means transferring the corporation’s stock. Transferring corporate ownership is a common situation for business owners, so we wanted to address this topic in our blog. Here’s how to transfer ownership of a corporation.
1. Consult your Articles of Incorporation and corporate bylaws.
While corporate stocks are freely transferable, some corporations—especially smaller or newer companies—put restrictions on the transfer of stocks. Consult your Articles of Incorporation and corporate bylaws to make sure this transfer of ownership doesn’t go against your corporate policies. Your Articles also specify the number of shares of stock your corporation is authorized to issue, and you can’t issue more than this number of shares. If your corporation is taxed as an S-corp, you can’t issue more than 100 total shares.
Learn how to transfer ownership within an S-corp.
2. Contact the board of directors or shareholders.
Your ownership transfer will need to be approved either by your board of directors or your shareholders, depending on the laws of your state and your own corporate policies. You should also hire an attorney and/or an accountant to advise you on the legal and tax implications of this transfer of ownership.
3. Find a buyer.
Find someone who wants to buy your company. Before you do this, you and your lawyer should come up with a plan of liquidation to make sure you make the maximum profit from the sale.
4. Transfer ownership of stock.
Transferring stock to the new owners officially transfers ownership of the corporation. Each stock is a share of ownership in the company. Different classes of stock come with different rights, including voting rights. S-corps can only have one class of stock, whereas C-corporations can have multiple classes. Here are the steps to transferring stock:
Calculate number of shares
First, calculate how many shares you own and how many outstanding shares (the total number of stocks owned by all shareholders) the company has. For example, let’s say Gina Wright owns 50 stocks in Electronics Inc. and Electronics Inc has 1,000 outstanding shares.
Decide what percentage of your shares you are transferring
Let’s say in our example that Gina Wright wants to transfer 25 of her stocks to Mark Wu, meaning they will both have 2.5% ownership in the company.
Decide on the compensation for the stocks
Gina Wright and Mark Wu will have to agree on how much Wu will pay Wright in exchange for the stocks.
Write a stock transfer contract
It’s important to get your transfer of stock in writing by creating a stock transfer contract. This can help you avoid disputes later on about who owns the company. Your stock transfer contract should include the amount of stocks transferred, the payment given for them, and the names of all people involved.
6. Inform the Secretary of State.
Often, when a corporation changes owners, the officers and directors change as well. When this happens, you’ll need to inform the Secretary of State (or equivalent government office in your jurisdiction) about the change. Typically, you can either update your officer/director information on your annual report or by filing Articles of Amendment.
Learn how to file Articles of Amendment in your state.
