How to change the number of stocks in S-Corp?
Submitted by Anonymous on Mon, 2007-08-13 17:20.
Dear Linda:
I just formed a S-Corp and filed form 2553
to IRS last week. However, I only issued
one share of stock to myself (100% already)
Is there any way that I can change the
number of share to something like 60000.
Any specific procedures or forms that I can
use.
Thank you very much.
Cherh-Lin Chen
ps. what is the difference aobut the number
of stock share in S-Corp?
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Number of Shares in a S-Corp
Hi,
I guess question in response is why do you want to change the number of shares? If you're the only shareholder, and always plan to be, then it doesn't matter how many shares you have as you will always own 100% of the outstanding shares. In that case, there's really no point in issuing more shares.
Regarding how to go about changing the number shares, your corporation will need to vote to issue more shares and then file the appropriate paperwork with the Department of Corporations and/or Secretary of State of the incorporating state. The forms and paperwork will differ from state to state.
L:)
Number of Shares in a S-Corp
Hi Linda:
Thank you for your answer. Let me explain why I think I need to increase the number of share.
I just received a note from IRS state that
"Losses in excess of Basic - Pursuant to Internal Revenue Code (IRC) section 1366, a shareholder in an S Corporation may not deduct S Corporation lossess in excess of their basis in stock and/or debt. Each shareholder's stock basis and debt (loans from shareholders) basis should be computed annually"
Since I only have 1 share (basis is 1 dollar),
how can I deduct any thing?
I hope I did not mis-interpret what IRS mean.
Now with this infomation, do I really need to increase the shares?
Thank you very much.
Chehr-Lin
S Corp Basis
Hi Chehr-Lin,
No, you don't need to increase your shares.
As an S Corp shareholder you may only deduct losses to the extent you have basis. However, basis has nothing to do with the number of shares you have. Your basis is the amount of contributions you make to the company to fund its business plus your share of any taxable income minus any tax losses and and distributions you take out of the company. This is an oversimplification, but it gives you an idea of how it works.
You'll notice the number of shares does not come into the calculation, only your percentage of ownership. Even if you only have 1 share and you contribute $10,000 to get the company started your at that point in time, your basis is $10,000.
Your basis is a cumulative number so it will grow or shrink from year to year based on the profitability of your company and the contributions or distributions you make.
L:)
Hi Linda: Thank you for
Hi Linda:
Thank you for taking time answering my questions. However, I think I still need to increase the number of share and its total value.
Here is what I quoted from IRS
"Taxable Distributions - Pursant to IRC section 1368, distribution to shareholders in excess of stock basis are generally taxable."
Currently, I only have total 1 share (100%) and total value of one dollar.
Any distribution to me will be taxable, that does not sound good in my case.
What do you think?
Thank you very much.
Cherh-Lin
Par Value <> Basis
Hi Cherh-Lin,
I understand what you're saying, but I guess I'm not being clear.:(
The IRS statement is correct. However, it sounds like you're trying to equate the par value of the share (1 share @ $1) with basis. I know this will sound strange but value is not the same as basis.
Par value is a somewhat mythical value you assign each share when you authorize the shares. It has next to nothing to do with the actual value of the share.
Basis in an S-Corp is only loosely related to the actual number of shares you own. It matters only to determine your percentage or share of the company's income or loss that flow to your personal return (and hence your basis). Since you own 100% of the corporation it really isn't a factor for you. Your S-Corp basis is the contributions you made to the company plus income less losses and distributions.
Your basis be $1 if you contributed $1 and there was no activity in the company. This would be so if you own 1 share at $1, 1 share at $60,000 or 60,000 at $1.
Another way you might have a basis of $1 is if you contributed $25,000 to start the company and the company has a $24,999 loss in the first year. At the end of that year your basis would be $1. If you took any distributions, they would indeed be taxable over $1. However, in this scenario it's highly unlikely that you would have the cash available to make a distribution.
Here's how to estitmate your basis in the S-Corp for the first year:
You see, you can completely ignore the one share at $1.
I hope this helps. If you're still confused send me an e-mail and we can calculate your basis using your actual data.
L:)
PS Also keep in mind, that as an S-Corp owner, you are a statutory employee. You should be taking a reasonable salary. If you only take distributions, no matter what your basis, the IRS can come back and deem that these were really compensation subject to employment taxes and hit you with the taxes and big penalties & interest.