Selling S-Corp Shares

February 25, 2025

by a searcher from Babson College in Amherst, MA, USA

I'm looking for advice on how to structure the sale of shares in an S-Corp. For example, let’s say you’re buying a company valued at $2 million, and the equity investor wants to buy in for 5% of the company. You would come in for 2.5%, with the remaining 2.5% being financed by the seller.

How do you handle this with an S-Corp, especially since the IRS requires that all ownership and financial arrangements be kept equal among shareholders? Should the equity injection be structured as a loan, or is there another way to handle this? What’s the fairest way to approach this when one party (in this case, myself) is taking on most of the financial risk?

I’d appreciate any insights or experiences from those who’ve dealt with similar situations in an S-Corp setup!

Reply by a professional
from University of Pennsylvania in Tysons, VA, USA

Hi Nikki, you're correct that issuing equity that does not receive returns proportional to the number of shares will blow the S election. If you structure it as a loan with upside tied to performance of equity, that can also blow the S election. Most buyers would require the seller to undertake a pre-closing F Reorg so they could buy equity of an LLC that is disregarded for tax purposes and would gross up the buyer for any adverse tax consequences. The buyer will have more flexibility in structuring its own ownership and will get a full step-up in the basis of the target's assets. Happy to discuss in further detail via direct message.

Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, I will also jump on the F reorg train. I assume your investors will want a preferred return, which, as you point out, cannot happen with an S-Corp. But I feel like some of your other issues can be resolved with standard self-funded searcher math. Even though a searcher may only put in 5% of the equity upfront, it is common for the searcher to walk away with a majority of the equity in the company at close (because the searcher has sourced the deal, will take on the PG, etc.). Apologies if I've misunderstood some of your concerns.

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