How to Divide the Shares in an S Corp Partnership

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Initial owners of an S corporation capitalize their interest by buying shares.
Initial owners of an S corporation capitalize their interest by buying shares. (Image: Jupiterimages/Photos.com/Getty Images)

An S corporation that has elected to be taxed as a partnership still maintains all of the legal functionality of a regular corporation. Owners are known as shareholders, and their interest in the company is represented by the percentage of stock owned. The initial owners who set up the company by filing articles of incorporation decide on the number of authorized shares to be made available for sale. Those shares are purchased by the initial owners at an amount and in a percentage that the initial owners agree to between themselves.

File articles of incorporation and indicate the number of authorized shares of stock that the corporation will initially issue. To come into existence, a corporation must file articles of incorporation with a home state. The state provides a fill-in-the-blank template that can be downloaded from the state's business registration website. Part of the articles format is a section to indicate the initial number of shares the owners are authorizing for sale. The shares are used to raise the amount of money the corporation needs to begin operations.

Hold a meeting of the owners to determine the corporation's initial capital needs. The owners must determine how much money the corporation requires to operate until it can generate income. This money can be raised through a combination of investments by owners and debt financing. The total amount the group determines should be contributed by owners as equity sets the basis for establishing ownership percentages.

Divide the number of authorized shares between the initial shareholders in proportion to their capital contribution. For example, if the S corporation has four initial shareholders, needs $1,000 in capital, authorized 100 shares of stock in its articles filing and wants all shareholders to own an equal stake in the company, each owner would have to put up $250 for 25 shares.

Record the issuance of stock on the stock transfer ledger in the corporate record book. By law, all stock transfers must be properly recorded in the corporate records. The stock ledger, more than any physical stock certificate, is the legal record of the corporation's ownership. The board of directors can vote to authorize additional shares of stock after start-up, or take on additional owners, but as long as the stock ledger correctly reflects the number of outstanding shares, the owners and the ownership percentages, the corporation is in compliance with its recordkeeping obligations.

Adjust each shareholder's capital account on the company books. Unlike a regular corporation, an S corporation must maintain a capital account for each shareholder, because the company is taxed as a partnership and will pass through income and losses to the owners. The capital account keeps track of every equity contribution made by the shareholder to the company, and every distribution from the company to the shareholder. The capital accounts are a cash flow record of how shares are divided.

Tips & Warnings

  • You don't have to issue physical stock certificates to shareholders to memorialize their interest. Simply recording an owner's contributions to his capital account is sufficient in a small corporation setting. A one-page stock purchase agreement can substitute for actual certificates.

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