This choice must always be approved by the shareholders of the firm being consumed. The bylaws of the consuming corporation will decide whether the transaction need the approval of the shareholders. In general, if the firms are combining to establish a new corporation, the transaction must be approved by the shareholders of both corporations. If the consuming corporation is simply buying an existing firm, then its board of directors may approve the transaction without further action from the shareholders.
In either case, the shareholders of the consuming corporation will usually include some or all of the following: employees, investors, customers. Employees would include union members so they can vote on whether to accept a buyout offer. Investors would include limited partners in partnerships or the owners of stock in corporations. Customers would include those persons or entities that purchase the products or services provided by the consuming corporation. As with employees and investors, these are just examples and not a complete list of possible shareholder groups. A corporation can have many more than three shareholders.
The shareholders of the consuming corporation will usually receive cash or shares of their choosing for their ownership interest. If the consuming corporation's shareholders are given cash, then they can use it to fund the purchase price of the merging firms or other items within the business. For example, if the consuming corporation is purchasing another company, then the cash may be used to pay for some of the assets being acquired. Otherwise, the cash would go to the surviving corporation as an exit payment.
As a result, S companies and their stockholders frequently engage in transactions. Shareholders may sell their shares directly to another person or institution, or they may do so through a broker. The proceeds from the sale of shares by a shareholder can be used to reduce the amount of income that the shareholder reports on IRS Form 1040, the form used to file a U.S. individual tax return.
If a shareholder dies, his or her estate must report the death on Form 706, United States Estate (and Generation-Skill Transfer) Tax Return. The estate must include with its return a statement indicating whether the decedent was a qualified small business owner at the time of his or her death. If the decedent was not a qualified small business owner, all of the S company's current shareholders must also be disqualified in order for the estate to avoid liability for any federal estate tax due on the portion of the S company's value exceeding $5 million.
A shareholder who is no longer an active one but who has not withdrawn completely from the company can "volunteer" his or her shares to the corporation. This action becomes effective upon publication of a notice to this effect in a newspaper of general circulation in the state where the company operates.
When there is more than one shareholder in a S company, care must be taken to avoid unintended terminations. New owners should not transfer shares to ineligible shareholders or engage in any other conduct that might jeopardize their S status. Some of these concerns may be alleviated by a shareholder agreement.
An S corporation cannot have more than 100 shareholders. A single share can be owned by many people at once, so this limit does not present an issue for S corporations. An S corporation's shareholders are treated as a single group for tax purposes. Thus, if an S corporation has more than 100 shareholders, it must file a federal income tax return even though it is a separate legal entity from its shareholders.
Shareholders can become separated for a variety of reasons. One common scenario involves two individuals who marry. If both spouses own stock in the S corporation and they divorce, then their economic interests would no longer be aligned. It could cause problems with respect to how each spouse reports his or her income on tax returns or whether one spouse can take a deduction against his or her income. To resolve these issues, parties can enter into a separation agreement or mutual consent decree. If the shareholders decide to separate themselves by entering into a settlement agreement, then they will need to determine what type of business should be formed (e.g., a private company or a public company) and which shareholders should have voting control over time.
Shareholders' rights and duties They receive a portion of the corporation's income (dividends). They will receive a portion of the corporation's assets when it is dissolved. Be notified of and attend shareholder meetings Directors are elected and dismissed. They manage the business affairs of the corporation. They can enter into contracts, etc., on its behalf.
Shares As mentioned, shareholders hold ownership interests in the company. These interests are represented by shares. Each share represents a fractional interest in the company's assets. Shares may be issued either in cash or with other stocks or bonds. For example, a company might issue 100 shares of stock for each $10,000 raised through capital investments, offerings of debt securities, etc. The company keeps track of how many shares are outstanding by using a ledger entry called a "share certificate." This document is filed with the state authority that regulates corporations. It contains information about the company, its directors, and its officers. Share certificates are important documents to have if you want to file any claims against the company later on; for example, if there is ever a bankruptcy filing, the trustee will need this document to identify the owners of the company and their interests in it.
The number of shares issued and outstanding determines your relationship to the company.
When it comes to the corporation, shareholders have specific rights. The right to vote, for example, to elect the corporation's board of directors or to modify the corporation's bylaws, is the most significant. Other rights include the right to receive information from the company on an annual basis and the right to receive dividends when issued by the company.
In exchange for these rights, shareholders give up some control over the company. They cannot interfere with the daily operations of the business without first getting permission from the board of directors or other appropriate authority. Also, they cannot remove the CEO or other officers of the company unless those positions are elected by the shareholders or exist by right of creation beyond that which is required by law.
Shareholders also have responsibility towards their investment. They should conduct sufficient research about the company before investing, learn what role each director or officer plays with the company, and ask relevant questions during shareholder meetings and in response to corporate disclosures. This will help them make informed decisions about their investments.
As far as laws go, corporations are considered to be "people" for purposes of federal law, so they can exercise many of the same rights as natural persons. For example, shareholders can sue the company for damages caused by its products, and the company can be sued for breach of contract if it fails to comply with its obligations under any agreements it makes with others.