S Corporation Structure Case Brief

Clearly stating expectations regarding profit, control, and transfer of shares is a benefit of an S Corportation.

Situation:
Three parties wanted to structure their interest in a business as follows:

Shareholder Profit Control Hours Worked
Individual 80% 50% Almost full time
Husband and Wife 20% 50% Part time

The clients required the liability protection provided by incorporating, but wanted to eliminate the double taxation of a corporation. As with most small businesses, they wanted to put limitations on the transfer of shares. The unique aspect of their agreement was in wanting to have their voting and control structure different from their profit payout percent. Specifically, the couple did not want to allow the individual to use his 80% voting rights to control the selection of the two directors on their board.

Solution:
Establish an S Corporation to enable taxes to be passed through and taxed on the owner’s individual tax returns. Craft the agreement to limit the transfer of shares. Issue shares in proportion to shareholders’ interest in profits. Clarify the desired control and voting structure to ensure equal power between the individual and the couple.

Benefit:
Clearly documented expectations regarding profit, control, and the transfer of shares. Cost savings in using a simple entity in place of multiple complex entities.

2018-12-21T15:09:52-08:00