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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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Which document needed to appoint a shareholder, if that shareholder

Resolved Question:

Which document needed to appoint a shareholder, if that shareholder did not invest money
Submitted: 5 years ago.
Category: Business Law
Expert:  socrateaser replied 5 years ago.
Hi,

I don't understand your facts. Shareholders are not appointed. Officers are appointed (directors are elected).

Please clarify what you are trying to accomplish. Thanks.

Customer: replied 5 years ago.
My business partner and I open a corporation and we had a 3rd guy joining us. On the s corp application, we put him down as a shareholder and no shareholder agreement were signed. Is it possible to remove him as a shareholder?
Expert:  socrateaser replied 5 years ago.
The IRS S-Corp election (Form 2553) requires shareholder consent at the time of election. But, there is no requirement that the election be updated afterwards. You don't need to remove the third person, if you mistakenly added him as a shareholder to the form, because what the IRS cares about is that there are no shareholders missing -- not that there may be an extra shareholder added.

Hope this helps.

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Customer: replied 5 years ago.
Is this mean the 3rd person is not legally binded as a shareholder until the shareholder agreement is signed?
Expert:  socrateaser replied 5 years ago.
The Form 2553 has no legal effect on corporate organization (i.e., who owns what). It only effects how the corporation is taxed by the IRS.

A person's signature on the form only means that the person consents to being taxed as an S-Corporation. It has no effect on the person's ownership interests in the corporation.

If you seek to bind the third person as an investor, then that person must invest in the corporation, and the corporation must issue shares to that person.

Hope this helps.

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Customer: replied 5 years ago.
We did issued the Certificate of Shares to the 3rd person. Is that legally binding? and what if we need to make a Shareholder Agreement. Can we ask him to give up his shares if he decide to leave the company and what if he doesn't agree to the terms? What else can we do?
Expert:  socrateaser replied 5 years ago.
You indicated that the shareholder paid nothing for the shares. If the goal is to cancel the shares, and this was all done on a handshake, but you originally expected payment from the shareholder, then you could simply cancel the shares and send notice of your action to the shareholder, on grounds that as there was no payment for the shares, those shares are rescinded for misrepresentation or mistake.

Then it would be up to the shareholder to sue and try to prove that he was entitled to the shares for free (i.e., the shares were either a gift, or in exchange for some personal service rendered or other performance on the shareholder's part).

If the shareholder paid for the shares, then you cannot cancel the shares, because to do so would be breach of fiduciary and/or conversion (civil theft) - and, possibly even criminal theft.

Hope this helps.

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Customer: replied 5 years ago.
The shares was given originally as an incentive for him to do his best for the company and this is not part of his salary/wage and we didn't expect any payment/investment from him. However, since he no longer wish to work for the company and there is no Shareholder Agreement in place. Can we simply revoke his shares? or can he hold on to the shares forever, until he want to cash out, even though he haven't work for the company for many years? How can we prevent that?
Customer: replied 5 years ago.
The shares was given originally as an incentive for him to do his best for the company and this is not part of his salary/wage and we didn't expect any payment/investment from him. However, since he no longer wish to work for the company and there is no Shareholder Agreement in place. Can we simply revoke his shares? or can he hold on to the shares forever, until he want to cash out, even though he haven't work for the company for many years? How can we prevent that?
Expert:  socrateaser replied 5 years ago.
Is there any written agreement between this person and the corporation?
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Customer: replied 5 years ago.
No

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