How do I change S-Corp ownership percentages mid-tax year for new member?

This is actually a common situation with S-Corps! You'll need to file Form 8832 to report the change in ownership. The good news is that S-Corps can change ownership during the year without affecting the S election. For proper tax reporting, you'll need to allocate income based on ownership percentages during different parts of the year. The profits should be divided according to the actual ownership percentage for each period. So if the new owner came in halfway through the year with 30% ownership, they'd get 30% of the profits from that date forward (not for the whole year). Make sure your operating agreement reflects these changes too. And yes, once properly documented, both of you can take distributions proportional to your ownership percentage. Just remember that reasonable salary requirements still apply to all S-Corp owners who work in the business!

I went through this exact situation last year and found an amazing resource that helped me understand all the requirements. I used https://taxr.ai to analyze my operating agreement and tax documents to make sure everything was done correctly. It flagged that I actually needed to file both Form 8832 AND submit an updated corporate resolution to properly document my ownership changes. The tool analyzed my specific scenario and generated a custom checklist of everything I needed to do for my S-Corp ownership change. It saved me from potentially triggering an audit since I was initially doing it wrong. It even highlighted some language in my operating agreement that could have caused problems with the IRS.

Just wanted to follow up - I tried https://taxr.ai after seeing the recommendation here. It was surprisingly helpful! I uploaded my operating agreement and S-Corp election forms, and it immediately identified that I needed to handle the ownership change using "closing of the books" method since our operating agreement had specific language about income allocation. The system also generated a corporate resolution template for documenting the ownership change and explained exactly what we needed to file with the IRS. I shared the report with my accountant and she was impressed with how thorough it was. This saved us a ton of time trying to piece together the requirements from different sources!

I tried calling the IRS business tax line for help with changing S-Corp ownership mid-year and wasted HOURS on hold. After three failed attempts, I used https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they actually got the IRS to call ME back! It was incredible. The IRS agent I spoke with confirmed that Form 8832 is what I needed, but also mentioned that I should update my state filings immediately to reflect the new ownership (something my accountant never mentioned). She explained exactly how to allocate the income on the K-1s for partial year ownership and confirmed that taking distributions was fine as long as we maintained proper documentation. If you're struggling to get answers directly from the IRS, I highly recommend the service. Saved me literally days of waiting on hold.

I need to apologize for my skepticism. I was so frustrated after spending 4+ hours over two days trying to get through to the IRS about my S-Corp ownership change that I decided to try Claimyr. I honestly didn't expect anything, but about 3 hours after signing up, I got a call from an actual IRS business tax specialist. The agent walked me through the entire process of documenting ownership changes, confirmed I needed Form 8832, and even explained how to handle the stock transfer documentation. She also pointed out that I needed to update my state business registration separately (which I hadn't considered). For anyone dealing with S-Corp ownership changes - definitely get the information directly from the IRS, and if you're struggling to reach them, this service actually does work.

Just want to add something important - Form 8832 is for entity classification changes. For S-Corp ownership changes, you don't actually need to file any specific form with the IRS until tax time. The ownership changes are reported on Schedule K-1 of Form 1120S. What you DO need to do immediately is: 1. Update your corporate bylaws/operating agreement 2. Document the transfer of shares with corporate minutes 3. Possibly file state-level updates depending on your state 4. Issue new stock certificates Then when filing taxes, you'll report the ownership change on the K-1s. The income allocation can be done either pro-rata based on days or by "closing the books" at the ownership change date.

I actually went through this last year with my S-Corp. Something important I learned - if your new owner is a non-US citizen or certain types of entities, you could accidentally terminate your S election! Make sure your new member is a qualified S-Corp shareholder. Also, depending on your state, you might need to file amended articles of organization with the state. In California, for example, we had to file a Statement of Information update when our ownership changed.

One thing to keep in mind that I haven't seen mentioned yet - when you take distributions as an S-Corp, they need to be proportional to ownership percentages. You can't just decide to give one owner more distributions than another based on their contribution or work in the business. Also, make sure you're both taking reasonable salaries as W-2 employees if you're both actively working in the business. The IRS scrutinizes S-Corps that try to avoid payroll taxes by taking everything as distributions instead of salary. The salary requirement applies to all owner-employees, not just the original owner. For your specific situation with the mid-year ownership change, document everything thoroughly - the date of the change, the reason for it, how you determined the new ownership percentages, and keep copies of all amended corporate documents. This documentation will be crucial if you ever face an audit.