S Corp Shareholder Agreement
Introduction
The S corp shareholder agreement is a contract between the shareholders of an S corporation. However, the content of shareholder agreement differs among the various S corporations. The shareholders also have the ability to decide what is included in the shareholder agreement, that is also referred to as a stockholder agreement. Basically, the shareholder agreement deals with share ownership, share valuation, and the responsibilities and rights of the shareholder.
S corp shareholder agreement vis a vis S corp partnership agreement
An S corp partnership agreement involves an informal business structure compared to an S corp shareholder agreement. Both are also similar regarding tax requirements for the capability to avoid the corporate taxes. Further, the S corp partnership agreement has the advantage in startups for their simplicity to organize. When a company begins to acquires profits, nonetheless, the advantage or merit, precisely regarding taxes, shifts to an S corp partnership agreement.
- Simplicity
If the partners desire having a simple business structure, an S corp partnership agreement would be more favorable. This is as compared to an S corporation. For a S corp partnership agreement, all that a partner has to a handshake and they are in business. However, for an S Corporation, one has to file incorporation paper in the state where the company will be based. The founders also have to apply to the Internal Revenue Service to be granted a Subchapter S designation. States require one to hold meetings regularly with the board of directors and an accurate record of the meetings should be maintained. However, formalities are a good thing for maintaining accurate records and clarifying the roles as well as ownership of the shareholders an S corp shareholder agreement. Most general partnerships draft a partnership agreement to avoid disputes in the future ad record the means for revolution of the problems that could arise.
- Personal Asset Protection
In an S corp partnership agreement, there is no legal separation between the company and their partners. In the event the company incurs debt or someone sues it, the personal assets of the partner stand the risk of paying of claims. Further, an S corporation is a separate legal entity from its members. Moreover, the personal assets of the shareholders can not be seized to settled the claims or debts that are held against the corporation. Nonetheless, courts can pierce the corporate veil in the event a judge rules that the corporation has no separate financial identity from the owners.
- Pass-Through Taxation
S corporations are similar to partnerships since both offer pass-through taxation of the profits of the company. Further, the partnership and corporations both file for information returns for the accounting of expenses and income. However, the resulting losses or profits are apportioned among the partners of corporate shareholders. The preceding then report on personal tax returns, whether or not all profits are distributed.
Further, the pass-through taxation avoids the double taxation that happens when a C corporation. It happens when the company pays up corporate tax on the profits and the same profits are taxed again when they are distributed among the shareholders.
- Employment Taxes
In a S corp partnership agreement, the general partners can pay income tax and self-employment tax on the share of profits. Further, only the limited partners, that is those that only invest in the business but do not participate in the day-to-day operations, report their profit share as passive income that is not subjected to self-employment tax.
In an S corporation, the shareholders that also participate in the operations of the company. They must thus be paid a reasonable wag which meets industrial standards and is deducted as a business expense. Any form of profit is then divided among the shareholders. Nonetheless, such passive income is not subjected to employment tases. The active shareholders that are signatories in an S corp shareholder partnership. The S corp partnership agreement’s partners also realize a solid tax advantage as long as there is enough income to cater for the wages and show profit.
Organizing a new business entity
Beginning a novel organization is quite an involving task. If one has no idea of where to begin, it is best if they engaged a professional. Generally, during the formation of a novel business entity, one needs to peruse the law of the relevant state before drafting an S corp partnership agreement. If one plans to form a partnership, some states are strict on formalities while others are not. Some have a registration requirement or minimum number of partners that should be included in the S corp partnership agreement. Further, before drafting a S corp partnership agreement, some of the states have registration requirements and a minimum number of directors. In forming an S corp, the corporate bylaws offer the definitions and details on how the corporations carry out and manage businesses. Further, the bylaws do not have to be filed with the relevant state, but is still a document that is legally required. The bylaws also serve as a final word on how any legal conflicts among the partners are solved. The preceding is after they exhaust the remedies contained in the S corp partnership agreement.
An instance of an issues that ought to be addressed in the bylaws is the manner in which the shareholders sell their shares. More often, the bylaws of an S corp require the company to be grated the opportunity to purchase the shares from a shareholder. There are also templates that are available on different websites regarding bylaws and S corp partnership agreements. However, it is best if partners or shareholders, before drafting an S corp partnership agreement or S corp shareholder agreement to consult with experts. Such include an attorney that is experienced with corporate law.
So as to qualify for S corporation status, a partnership or corporation must outline certain criteria that is set by the Internal Revenue Service. The same applies to the drafting of a S corp partnership agreement. For instance:
- The entity can only issue a class of stock.
- The entity is limited to 100 shareholders.
- All the company shareholders ought to be American citizens.
- Partnerships and corporations are not allowed to purchase company stock shares.
In the event a business entity fails to met the preceding conditions during a tax year, it is treated as a C corporation for tax purposes. Such eliminates the advantages that S corps offer shareholders. It is thus advisable that all business entities and agreements like the S corp partnership agreement stays within the outlined guidelines.
How to draft an S corp partnership agreement
An S corporation or entity is a business that chooses to be taxed under the S subchapter of the Internal Revenue Code. Though there are various differences between a C corp and S corporation, the latter must create an S corp partnership agreement. It could also create an S corp shareholder agreement or bylaws that contain specifications on the governing of the company. Further, every state has a unique set of laws that outline what an S corp partnership agreement or S shareholder agreement should include. When drafting such agreements, the owners of the businesses should be conversant with the requirements and follow them.
The following are examples of the elements that should be included in an S corp partnership agreement and S corp shareholder agreement:
- Basic information on the business entity
The top section of the agreements should include a list of the registered name of the entity. It should also include its registered aggress, the main business place, and trade names of operation.
- Information on the key players
A good S corp partnership agreement should indicate the general partners and limited partners. Further, an S corp shareholder agreement ought to outline the number of directors of the business. It should also include the maximum number of directors that can be appointed and their term length. Such include the CFO and CEO as well as their respective duties.
- Information on meetings
Partnerships, just like corporations, ought to hold meetings annually. Hence an S corp partnership agreement should include information on how often the meetings will be held. The same applies to an S corp shareholder agreement. A section of the location and frequency of all the directors’ and shareholders’ meetings should be included. Further, the number of shareholders and directors present must be declared.
- Description of record keeping plans
The maintenance of business records is required and beneficial to the legal and audits department. Hence the need for a S corp partnership agreement S corp shareholder agreement to include section on what records must be kept. Most state laws require that certain records like meeting minutes of directors and shareholders are maintained. The law also requires that the corporate officers grant shareholders access to the company records for inspection.
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