Question

Sarah, Nicloe and Chance are each 1/3 owners of a company. The company initially was formed as an S Corp but was doing so well that Sarah and Nicole wanted to take the company public. Suppose Chance is a U.S. resident but a French citizen. His mother has recently been diagnosed with a terminal illness, and Chance has decided to move back to France to take care of his mother and her affairs. He anticipates that he will live in France for several years and that he will no longer be considered a U.S. resident. If you were Sarah and Nicole how would you react to Chance's decision to move? Would you ignore the impact that it may have on the S Corporation status? Would you pressure Chance to sell his stock to you?

Provide support, with proper citations, for your response.

Answer 1

An S Corporation is closely holded entity with limited shareholders restricted to 100 in number. Such shareholders can be strictly US Citizens or Resident Aliens.

In the given case study, Sarah, Nicole and Chance own an S Corp equally. Now they wish to go public. It must be noted that in order to go public, they have to convert their S Corp either into C Corp or LLC as only these can list their shares and go public.

It is noteworthy that C Corp have no restriction on ownership. It can have even Foreign Citizens and Non Residents as shareholders.

Now, in the given case,Sarah and Nicole decided to take their S Corp public, and on the other hand Chance had to leave for France for an undecided term. For going public the S Corp would have to be converted into C Corp or LLC and the same can then have Chance as shareholder. Hence, Chance would not be required to sell his stake in such case.

However, if they had decided not to convert and not to go public, then they would have to pressurize Chance to sell his stake before shifting to France.