How to Transfer S Corp Stock to a Family Member
Passing S Corp shares to a relative requires careful planning to manage tax outcomes and preserve the company's crucial S election status.
Transferring S corporation stock to a family member is a frequent part of managing a family-owned business for succession and estate planning. This process allows owners to pass ownership to the next generation, but the transfer is regulated by specific IRS and corporate rules. Following these regulations is necessary to protect the S corporation’s tax status and ensure a smooth transition for the business and family.
Key Decisions and Information Gathering
The first step in transferring S corporation stock is deciding on the method of transfer, which can be a gift or a sale. A gift is often used in estate planning, while a sale may be appropriate when the current owner needs liquidity or wants the family member to have a direct financial investment.
Regardless of the method, establishing the stock’s fair market value (FMV) is required. For a gift, the FMV determines if any gift tax is owed, and for a sale, it sets the purchase price. Since S corporation stock is not publicly traded, valuation often requires a formal appraisal from a qualified professional.
You must also confirm the family member’s eligibility to be an S corporation shareholder. The IRS imposes strict limitations to preserve the company’s pass-through tax status. Shareholders must be individuals who are U.S. citizens or residents, though certain trusts and estates are also permissible. Transferring stock to an ineligible shareholder, such as a non-resident alien or a corporation, will automatically terminate the company’s S election and can lead to adverse tax outcomes.
Required Documentation and Corporate Formalities
To execute the transfer, a stock transfer agreement is the central legal document. This agreement should identify the transferor and transferee, state the number of shares, specify the transfer date, and describe the consideration—either the purchase price or a statement confirming it is a gift.
The transfer must also receive formal approval from the corporation through a corporate resolution adopted by the board of directors. The resolution serves as the official authorization from the company for the stock to change hands, demonstrating that the transaction was conducted in accordance with the corporation’s governing documents.
Following approval, the corporation’s internal records must be updated. The old stock certificate is voided, a new certificate is issued in the family member’s name, and the company’s stock ledger is updated to reflect the new shareholder’s details.
Tax Reporting and Consequences
The tax implications differ based on whether the shares are gifted or sold. If the stock is a gift, the transferor must consider federal gift tax rules. For 2025, the annual gift tax exclusion is $19,000 per recipient. If the stock’s fair market value exceeds this, the transferor must file Form 709, United States Gift and Generation-Skipping Transfer Tax Return.
The tax basis of the stock for the family member affects their future tax liability. If the stock is a gift, the recipient assumes the transferor’s original basis, known as a “carryover basis.” If the stock is purchased, the recipient’s basis is their “cost basis,” which is the price they paid. A lower basis results in a higher taxable gain when the recipient eventually sells the stock.
Upon becoming a shareholder, the family member receives a pro-rata share of the S corporation’s income, losses, deductions, and credits. The new shareholder is liable for income tax on their portion of the company’s profits, regardless of whether the company makes cash distributions.
Executing the Transfer and Post-Transfer Actions
The transfer is executed when both parties sign the stock transfer agreement. The corporation then finalizes the change by recording the transaction in the corporate stock ledger and delivering the new stock certificate to the family member shareholder.
Post-transfer actions involve fulfilling tax reporting obligations. The transferor must file Form 709 with the IRS if the gift’s value exceeds the annual exclusion. The S corporation will report the ownership change on its Form 1120-S tax return and issue a Schedule K-1 to the new shareholder, officially documenting their share of financial activities for the tax year.