An S corporation is a regular corporation with a special tax designation as a small business corporation. It issues shares of stock that represent the percentage ownership interest of each owner, just like a regular corporation. Those shares of stock are freely transferable, subject to any restrictions that might be in place through a shareholder's agreement.
Call a meeting of shareholders. Have the secretary verify the ownership percentage of the retiring shareholder. If there is a shareholder's agreement in place that establishes a procedure for buying a shareholder out, follow the agreement. If no agreement exists, consult an accountant and set a value on the retiring partner's shares in the business.
Execute a stock purchase agreement between the shareholder and the corporation. This is basically a bill of sale that outlines the number of shares being sold, the date of the transfer and the consideration paid. Template forms are available for use through an Internet search or you can have an attorney draft an agreement.
Have the retiring shareholder sign over his shares of stock if stock certificates were issued. Then have the corporate secretary record the stock transfer in the corporate records book. Once the stock is transferred, either physically by signing the stock over or through the execution of the stock purchase agreement, and the payment for the stock has been received by the retiring shareholder, the shareholder is no longer an owner of the S corporation.
Redistribute the recaptured shares of stock among the remaining shareholders. An S corporation is a pass-through entity, meaning it does not pay taxes itself but passes all of its profits and losses to its shareholders to be reported on their individual tax returns. One hundred percent of an S corporation's profits and losses must be allocated to its shareholders every year so taxes can be paid. An S corporation is not allowed to have treasury stock (stock that is not owned by a person but is owned by the corporation itself).
Prepare the corporation's tax return (Form 1120S) at the end of the year. Close out the retired shareholder's interest for the part of the year her share was owned, record any capital gains and reflect the transfer of interest to the other shareholders on the appropriate schedules. See an accountant for the proper way to prepare the corporation's return to reflect the sale of stock.