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Question about share issuance

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bmg05

Junior Member
What is the name of your state? Florida

We set up a corporation online. The corporation has the right to issue 2 shares (I'm unsure why that number was chosen). We stupidly did not consult an attorney to set up the corporation.

If there are three officers listed on the articles of incorporation and no Directors, how do we go about issuing shares. Can only the incorporators of the corporation be present at the inital meeting for issuance of shares or will all officers listed on the articles need to be there.

We have not had any official meetings yet.

Also, the corporation was changed to an S Corporation, with two of the officers splitting the proceeds 50/50. The third officer is not receiving any funds from the business.

We'd like to have the share issuance go to the two officers on the s corp, the share par value be equal to each shareholders investment in the corporation. Since the corp is only authorized to issue to shares can each share be for different par values? (i.e. Officer #1 invested $75,000, Officer #2 invested $65,000; can one share par value be for $75K and the other be for $65K?)

Please advise! We need some help!
 
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oldman9

Junior Member
You need to read up on some basics of how a corporation operates, else your questions require too much to answer.

The corporation has the right to issue 2 shares (I'm unsure why that number was chosen).
The corp has the right to issue any number of shares that it wants to. The State is only interested in the number of shares so that it can collect the annual fee. (Some states don't collect the annual fee at all.) Just pass a resolution to increase the number of shares!

If there are three officers listed on the articles of incorporation and no Directors, how do we go about issuing shares. Can only the incorporators of the corporation be present at the inital meeting for issuance of shares or will all officers listed on the articles need to be there.
The corp issues shares to *shareholders*, not necessarily to officers! This is a key distinction that you must make.

The incorporators are good only for filing the Articles. After that, the officers take over. The officers then decide on how to issue shares.

We'd like to have the share issuance go to the two officers on the s corp, the share par value be equal to each shareholders investment in the corporation. Since the corp is only authorized to issue to shares can each share be for different par values? (i.e. Officer #1 invested $75,000, Officer #2 invested $65,000; can one share par value be for $75K and the other be for $65K?)
No, the par value of each share must be the same for all shares. Each shareholder can have different number of shares.

Another key distinction that you must make is that *ownership* of the corporation does not directly translate to how each shareholder is *taxed*! Let's say the corp has 3 shareholders. Shareholder #1 "owns" 50% of shares, #2 30%, #3 20%. The IRS may decide to tax them all equally at year-end, regardless of their ownership percentage.
 

tranquility

Senior Member
I was agreeing with you all the way through until:
Another key distinction that you must make is that *ownership* of the corporation does not directly translate to how each shareholder is *taxed*! Let's say the corp has 3 shareholders. Shareholder #1 "owns" 50% of shares, #2 30%, #3 20%. The IRS may decide to tax them all equally at year-end, regardless of their ownership percentage.
What do you mean by this?
 

tranquility

Senior Member
For an S Corp, the net profit at year-end is considered by the IRS to be equally distributed to all shareholders, regardless of their ownership percentage.
Are you saying the ownership percentage is going to be different from the shareholder percentage? In other words, if A puts in $10 and B puts in $20 and C puts in $30, but each is issued 1 share of an S-corp because A and B brought together the idea or for some other reason, are you saying their ownership percentage is different from the percentage of stock owned?

(Of course, deductibility of losses would be related to shareholder basis.)

Ah..ha edit:
If the stock is transferred during the year, the pro rata K-1 results will be proportional to the time held between the two (or more) owners of the stock. Therefore the instant ownership percentage at the end of the year may not reflect the distribution. In our fact scenario this is not relevant, but I understand what you are saying.
 
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oldman9

Junior Member
Are you saying the ownership percentage is going to be different from the shareholder percentage?
"Ownership percentage" and "shareholder percentage" are the same.

What I am saying is, for tax purposes (and tax purposes only), the *net profit* within an S corp is considered equally distributed. Let's say the S corp nets $100k for tax year 2007 and has 4 shareholders, each shareholder will get a K-1 of $25k each, no matter what their actual ownership percentage is. This is true ONLY for S corps.

Besides this treatment by the IRS, for their own purposes, each shareholder may own a different percentage of the S corp.
 

tranquility

Senior Member
I guess I was wrong in my ah..ha.

What I am saying is, for tax purposes (and tax purposes only), the *net profit* within an S corp is considered equally distributed. Let's say the S corp nets $100k for tax year 2007 and has 4 shareholders, each shareholder will get a K-1 of $25k each, no matter what their actual ownership percentage is. This is true ONLY for S corps.
I agree it is a pro rata distribution. I disagree with the "no matter what their actual ownership percentage is".

Besides this treatment by the IRS, for their own purposes, each shareholder may own a different percentage of the S corp.
What do the shares represent?
 

oldman9

Junior Member
What do the shares represent?
The shares are for the State to collect its annual fee from the corp (as many States compute the annual fee from the capital amount), and for internal score keeping within the corp (voting, benefits, ownership, etc.).
 

tranquility

Senior Member
The shares are for the State to collect its annual fee from the corp (as many States compute the annual fee from the capital amount), and for internal score keeping within the corp (voting, benefits, ownership, etc.).
To the question, "What do the shares represent?", the answer is ownership.

If we know no other facts, no agreements, no orgainizing documents, no knowledge of individual basis, nothing...except for the fact that S-corp has 100 shares of stock outstanding and A holds 33 shares and B holds 67 shares, can we tell their ownership percentage?

I say yes. Your posts seem to imply there is some difference between the stock owned and the ownership percentage of the corporation.

For an S Corp, the net profit at year-end is considered by the IRS to be equally distributed to all shareholders, regardless of their ownership percentage.
and,
Another key distinction that you must make is that *ownership* of the corporation does not directly translate to how each shareholder is *taxed*! Let's say the corp has 3 shareholders. Shareholder #1 "owns" 50% of shares, #2 30%, #3 20%. The IRS may decide to tax them all equally at year-end, regardless of their ownership percentage.
I believe you are incorrect. This is not the meaning of pro rata. Since ownership percentage is represented by stock ownership percentage the pass through in the second example is not equal. Pro rata is important because ownership in stock can change during the year. The distribution is based on the stock percentage times the percentage of days held in the corporate year. The pro rata is related to the share of stock and not to the people holding stock.
 

oldman9

Junior Member
Your posts seem to imply there is some difference between the stock owned and the ownership percentage of the corporation.
Well, this is not a tax accounting forum. If the desire is to be taxed according to ownership percentage then OTHER forms of entities would be preferred, like LLCs. Otherwise, for S corps, all stockholders are given the same K-1 amount.

Besides this difference in tax treatment, stocks owned = ownership percentage.
 

tranquility

Senior Member
Well, this is not a tax accounting forum. If the desire is to be taxed according to ownership percentage then OTHER forms of entities would be preferred, like LLCs. Otherwise, for S corps, all stockholders are given the same K-1 amount.

Besides this difference in tax treatment, stocks owned = ownership percentage.
You are in error and should not continue to imply there is a difference in taxation other than how I have described. If the desire is to be taxed according to ownership percentage an S-corp is no different from an LLC as long as there has not been a transference of shares during the corporate year.

The implication that all stockholders are given the same K-1 amount is not correct. Period. You are mistaken as to what the pro rata requirement of the code means. While I am not the S-corp guru at the office, I know how to prepare a tax return for an S-corp and it is not the way you are expressing. The law is not designed to create a non-sensical quirk where minor owners are taxed the same amount as majority owners, but to recognize S-corps tend to distribute wealth to stockholders though the year.

If you disagree with anything I've written previously or here, show an example of how you think a K-1 would be prepared using specific facts. I will then give my opinion citing authoritative sources.
 

DStaub

Member
There are a number of errors or incomplete answers in this thread that have gone uncorrected. I am not going to try to correct all of them, but some of them may send the original poster down the wrong track, so I am going to point out a few of them:

The corp has the right to issue any number of shares that it wants to. The State is only interested in the number of shares so that it can collect the annual fee. (Some states don't collect the annual fee at all.) Just pass a resolution to increase the number of shares!
If the number of authorized shares is two, this is wrong. The corporation may not issue more shares than are authorized in its articles of incorporation. You will need to amend the articles of incorporation (in accordance with Florida law) , including filing the amendment with the Florida Secretary of State. Only then can the directors pass a resolution issuing additional shares.

The incorporators are good only for filing the Articles. After that, the officers take over. The officers then decide on how to issue shares.
The officers do not take the place of incorporators, the directors do. The officers also cannot decide to issue additional shares; that is the role of the directors, although the officers can issue the shares under the direction of the board of directors.

... the par value of each share must be the same for all shares. Each shareholder can have different number of shares.
For all practical purposes, this is true but not a complete answer. For an S corporation (as the poster indicated this is), each share must have equal rights to dividends and equal rights upon liquidation. Assuming that "par value" means a liquidation preference (which is not necessarily true) the answer is correct in that if you have different liquidation rights (as you are certainly entitled to do under Florida corporate law), doing so will terminate your S election. On the other hand, if you do not care about your S corporation status, different shares can have different par values by setting up multiple classes of stock.

... for S corps, all stockholders are given the same K-1 amount.
Although tranquility already corrected this statement which was made by oldman9 in several different ways, it is absolutely not true. Each shareholder will be taxed based on the percentage of shares owned by him or her during the taxable year. Any exceptions will terminate the S election. If someone owns 33 of 100 shares, he must be allocated exactly 33% of the income, gain, losses, deductions and credits of the S corporation. There is no flexibility.

bmg05. if you want flexibility and you are not too far into the business, you may want to think about converting the corporation to an LLC. That is a taxable transaction, however, and should not be done without carefully reviewing the potential tax consequences with your accountant. Another thought, if your intent is simply to someday repay the shareholder who put in the extra $10,000, is to issue a note to him that bears interest at the lowest rate allowable by the IRS without triggering imputed interest. That obviously changes the dynamics somewhat but may be the closest thing to what you want without restructuring the business as an LLC. Be careful that the note is treated as a valid note and not a second class of stock, or it too could terminate your S election.
 

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