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You may be trying to figure out how to transfer S corp stock to a family member because your child is joining the family business, your spouse now needs to appear in the ownership records, or succession planning has moved from “someday” to an actual decision.
That decision can affect taxes, control of the company, voting rights, and the long-term plan for the S corporation. It can also affect S corp eligibility because stock transfers must comply with IRS shareholder and ownership rules.
This article explains what business owners should review before transferring S corp shares to a family member, including fair market value, gift tax, capital gains tax, carryover basis, step-up in basis, shareholder eligibility, and company records.
Before transferring S corporation shares to a family member, work through six key questions:
Succession goals: What should the transfer accomplish? Decide whether you want to bring a family member into ownership, receive payment for your shares, transfer the business gradually, retain control, or plan what will happen after your death.
Shareholder eligibility: Can the intended recipient legally own S corporation shares? Confirm that the transfer will not jeopardize the company’s S corporation status.
Transfer restrictions and approvals: Do the company’s bylaws, shareholder agreement, buy-sell agreement, or prior consents restrict the transfer or require notice, approval, or an offer to other shareholders?
Ownership and control: How much of the company should your family member own, and which rights should accompany the shares? Consider voting power, distributions, management influence, and whether you want to retain control.
Transfer method, value, and tax treatment: Should the shares be gifted, sold, transferred to a spouse or trust, or arranged to pass after death? Establish their fair market value and compare the potential gift-tax, capital-gains, stock-basis, and inherited-property consequences.
Documents and company records: What must be completed after choosing the transfer structure? Properly document the transaction, obtain the required corporate approvals, and update the stock ledger, ownership records, certificates, and related agreements.
If you own a C corporation, read our guide on how to transfer ownership of a C corporation to compare five ways to transfer its shares.
The appropriate way to transfer your S corporation shares depends on what you want the transaction to accomplish. Before choosing a method, consider whether you need payment, when you want your family member to become an owner, and how much control you are prepared to give up.
| If you want to... | You should consider... |
|---|---|
| Bring a family member into ownership without requiring them to make a purchase | Gifting some or all of your shares |
| Receive payment from your family member for your ownership interest | Selling some or all of your shares |
| Receive payment when your family member cannot afford the full price immediately | A gradual sale, installment payments, or seller financing |
| Bring in a family successor while retaining control | Transferring part of your interest and addressing voting and management rights separately |
| Add your spouse as an owner | Transferring some of your shares to your spouse |
| Remain the owner during your lifetime | Arranging for the shares to pass at your death |
| Place the shares under a longer-term family succession or estate plan | Transferring the shares to an eligible trust during your lifetime or at death |
Before transferring shares, confirm that the recipient is eligible to own them. Individuals who are U.S. citizens or residents generally qualify, as do estates, certain trusts, and certain tax-exempt organizations. Partnerships, corporations, and nonresident aliens generally cannot own S corporation shares.
An S corporation may have no more than 100 shareholders. However, certain family members may be treated as one shareholder when applying this limit, so bringing several relatives into the company will not necessarily cause it to exceed the limit. A transfer to an ineligible shareholder could terminate the company’s S corporation status and change how the entire business is taxed.
Before the shares change hands, an attorney can review the proposed recipient, the company’s governing documents, and any trust involved to identify restrictions or required approvals. The attorney can also coordinate with the company’s tax adviser to ensure that any necessary tax elections are completed on time.
You may own the shares, but that does not always mean you can transfer them freely. Your company’s governing documents and existing agreements may limit who can receive the shares, require approval, or give the company or other shareholders the first opportunity to buy them.
The documents that may affect your proposed transfer include:
The company’s bylaws
Shareholder and buy-sell agreements
Rights of first refusal
Restrictions on gifts and family transfers
Notice and approval requirements
Mandatory purchase provisions that apply after a shareholder’s death
Prior consents or other agreements affecting the shares
Reviewing these documents will help determine whether you must notify other shareholders, offer them the shares first, or obtain approval from the board or shareholders. You may also need to change the proposed transfer to comply with an existing agreement.
Not sure what your agreements require? Our fixed-fee Family Business Ownership Transfer Assessment can identify potential restrictions, required approvals, and the documents needed to move forward..
Transferring shares does not have to mean giving up complete control of the company. Before deciding how many shares to transfer, consider what you want your family member to receive now and which responsibilities or decisions you want to retain.
Questions to consider include:
What percentage of the company should your family member own?
Should they have voting rights or only an economic interest?
Will they receive a proportional share of distributions?
Should they participate in major company decisions?
Will they also become an employee, officer, or director?
Do you want to transfer ownership gradually or at one time?
The percentage transferred can affect voting power, distributions, and the balance of control among shareholders. However, owning shares does not automatically give a family member authority to manage daily operations. Management roles and decision-making powers may be governed separately by the corporation’s bylaws, shareholder agreement, and board appointments.
An S corporation generally may have only one class of stock. This means its shares must have identical rights to distributions and liquidation proceeds. Differences in voting rights, however, do not necessarily create a second class of stock. Depending on the company’s governing documents, an owner may be able to transfer nonvoting shares to a family member while retaining voting control.
Start by identifying how and when the shares will move and who will receive or hold them. The following scenarios can overlap: for example, you might give shares to your spouse, sell them to another family member, or transfer them to a trust.
Each approach can involve different tax consequences, documents, eligibility requirements, and changes in control.
You may give some or all of your shares to a family member without receiving payment. This approach often arises when an owner wants to bring a child or another relative into the ownership of the family business.
If your family member will pay less than fair market value, the transaction may be treated as partly a sale and partly a gift. Establishing the value of the shares can help you structure and document the transfer properly.
You may sell your shares to a family member and receive the full purchase price at closing or accept payment over time through an installment arrangement or seller financing.
If you will receive payment over time, the agreement should establish when ownership and voting rights will transfer, how payments will be made, and what will happen if the buyer fails to pay.
You may transfer shares to your spouse when they become a co-owner or when you need to align the company’s ownership records with your estate and succession plans.
Before completing the transfer, decide what ownership rights your spouse will receive and confirm that the transfer complies with the company’s governing agreements. Becoming a shareholder does not automatically give your spouse a management position or authority over daily operations.
If you own the shares individually when you die, your executor or personal representative may administer them as part of your estate and distribute them under your will or applicable inheritance law. If a trust owns the shares, the trustee will follow the trust’s instructions.
A shareholder or buy-sell agreement may instead require your estate, trust, or successor to sell the shares to the company or the remaining shareholders. Coordinating your estate plan with the company’s agreements can help prevent conflicting instructions and ownership disputes.
You may transfer shares to a trust as part of your estate or family succession plan. However, only certain trusts qualify to hold S corporation shares, and some require a timely tax election.
Before completing the transfer, confirm that the trust qualifies as an S corporation shareholder, that the necessary elections will be made, and that the company’s governing agreements permit the transfer.
Before giving or selling shares to a family member, establish a supportable value. That value may determine the sale price, the amount of the gift, and any related tax reporting. An informal estimate may be difficult to defend if the IRS, another shareholder, or a family member later questions it.
If you are transferring only part of the company, do not assume the shares are worth the same percentage of the company’s total value. Voting rights, control, and marketability may affect their value. A professional valuation may be appropriate for a significant gift, family sale, or transfer after death.
The following examples describe general federal tax consequences. State tax treatment and the result of a particular transfer may differ, so you should coordinate the transaction with legal and tax advisers.
Consider Robert, who owns all 100 shares of a family business taxed as an S corporation. The company is worth $1 million, and Robert’s adjusted basis in his shares is $200,000. He wants to transfer 40 shares to his daughter, Maya. For this example, assume the shares are worth $400,000 and have an allocated basis of $80,000.
Gifting the shares allows Robert to bring Maya into ownership without requiring her to finance a purchase. However, Robert receives no payment for the shares and generally does not recognize taxable gain merely because he makes the gift.
Under this example, Maya generally begins with Robert’s $80,000 adjusted basis in the transferred shares, not their $400,000 fair market value. The gift therefore transfers the shares’ built-in appreciation to Maya. If she later sells the shares, her taxable gain will generally be calculated using that carryover basis, as adjusted while she owns them.
The gift may also have federal gift-tax consequences. If its value exceeds the annual exclusion, Robert will generally need to report the transfer on a federal gift-tax return. The annual exclusion does not limit how much he may give, and exceeding it does not necessarily mean he will owe gift tax. The amount above the exclusion may instead use part of the federal gift-and-estate-tax exemption available to him during his lifetime or at death.
Because this is stock in a privately held company, Robert should not assume that the value of the transferred shares is simply the same percentage of the company’s total value. He should obtain a supportable valuation and coordinate the transfer with his attorney and tax adviser before the shares change hands.
If Maya pays Robert $400,000, Robert’s potential gain would be $320,000:
Sale price: $400,000
Robert’s adjusted basis in the shares: $80,000
Potential gain: $320,000
Maya would generally begin with a $400,000 basis in the purchased shares.
Maya could pay the full price at closing, or Robert could accept payments over time. Before choosing seller financing, Robert should understand when he will recognize the gain, whether the arrangement qualifies for installment reporting, and what protection he will have if Maya stops paying.
Selling the shares for less than their fair market value will not necessarily avoid gift-tax issues. The difference between the shares’ value and the amount Maya pays may be treated as a gift.
Robert generally would not recognize gain or loss if he transferred the shares to his spouse. His spouse would usually receive the same adjusted basis he had in the transferred shares.
Different rules apply if Robert’s spouse is a nonresident alien. The company must also confirm that the spouse is eligible to own S corporation shares before completing the transfer.
If Robert owns the shares when he dies, the person who inherits them will generally receive a basis based on their fair market value at Robert’s death. If the 40 shares are worth $400,000 at that time, the recipient’s basis would generally be $400,000.
This basis adjustment could significantly reduce the gain on a later sale. However, waiting until death may not accomplish Robert’s other goals, such as bringing Maya into ownership now or gradually transferring control while he remains involved.
Robert must also coordinate his estate plan with any shareholder or buy-sell agreement that controls what happens to the shares after his death.
A trust is not a separate transfer method. Robert may give or sell shares to a trust during his lifetime or arrange for a trust to receive them after his death. How the shares enter the trust will determine the tax consequences.
The first question is whether the trust may own S corporation shares. Only certain trusts qualify, and some require a timely QSST or ESBT election. Transferring shares to an ineligible trust could terminate the company’s S corporation status.
Robert should confirm the trust’s eligibility and any required elections before transferring the shares — not after the company discovers a problem.
Once Maya becomes an owner, the company may allocate part of its taxable income to her and issue her a Schedule K-1. She may owe tax on that income even if the company does not distribute the same amount to her in cash.
Robert and Maya should therefore discuss the company’s distribution policy and how they will cover taxes on pass-through income. They should also coordinate the transfer date with the company’s accountant because it can affect how the company’s income is divided between them for that tax year.
After choosing how the shares will change hands, you must properly document the transfer and update the company’s records. There is no single S corporation stock-transfer form that works for every transaction. The required steps will depend on whether you are gifting or selling the shares, transferring them to a trust, or arranging for them to pass after your death.
Generally, completing the transfer involves four steps:
Put the transfer terms in writing. The documents should identify who will receive the shares, how many shares will be transferred, when the transfer will take effect, and whether the recipient will pay for them. If payment will be made over time, the documents should also explain the payment schedule and what happens if the buyer does not pay.
Obtain any required approvals. Your company’s bylaws, shareholder agreement, or buy-sell agreement may require notice to other shareholders or approval from the board or shareholders. The new owner may also need to agree to follow an existing shareholder or buy-sell agreement.
Update the company’s ownership records. The corporation should update its stock ledger and other ownership records to show who owns the shares after the transfer. If the company uses stock certificates, existing certificates may need to be canceled and new ones issued.
Coordinate with the company’s accountant. The accountant will need the new ownership information and the effective date of the transfer to properly allocate income, prepare Schedule K-1s, and maintain tax records. Certain transfers, particularly transfers to trusts, may also require additional tax elections or filings.
An attorney can help determine which documents and approvals are required, prepare or review the transfer documents, and make sure the company’s ownership records accurately reflect the change..
If you are preparing to transfer ownership of your New Jersey or New York family business, you first need to understand what approvals, company records, contract restrictions, filings, and next steps should be reviewed before the transfer moves forward.
Wilkinson Law LLC offers a Family Business Ownership Transfer assessment fixed fee service for business owners who want a focused legal review before committing to the full transfer process. You receive a concise written action plan outlining the required documents, approvals, filings if any, proposed timeline, and anticipated cost for implementation.
To see whether this fixed-scope assessment is right for your business, review our Assess Family Business Ownership Transfer for New Jersey and New York Companies fixed fee service.
Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.
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Yes. S corp stock can generally be transferred to a family member, but the transfer should be reviewed before the shares move. The company’s bylaws, shareholder agreement, buy-sell agreement, and prior consents may limit or condition the transfer. The company should also confirm that the recipient is eligible to own S corp stock and that the transfer does not create tax, control, voting, or recordkeeping problems.
Yes. A shareholder may gift S corporation stock to a family member, but the gift should be supported by fair market value and properly documented. The transfer may raise gift tax reporting issues, and the recipient may take the donor’s carryover basis in the shares. Before gifting S corp stock, business owners should also confirm that the recipient is an eligible S corp shareholder and that the company’s governing documents allow the transfer.
Sometimes a stock transfer may not create immediate income tax, but that does not mean the transfer has no tax consequences. A gift may raise gift tax reporting issues. A sale may create capital gains tax. A transfer after death may involve step-up in basis rules. The tax result depends on how the shares are transferred, the value of the stock, the owner’s basis, and whether the transfer happens during life or after death.
After an S corp stock transfer, the company should update its stock ledger, ownership records, transfer documents, and any required approvals or consents. If the transfer changes voting rights, distribution rights, or management influence, those changes should also be reflected in the company’s records. Clear records help show who owns the shares, when the transfer happened, and whether the company followed its governing documents.
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