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Does a Restricted Stock Sale require Amendment to the Articles of Incorporation?

We have a CA Corp currently using the S-Election but we intend to change. We're considering doing a Restricted Stock Sale as incentive compensation for a new key employee and we'd like to understand whether an Amendment to the Articles of Incorporation is needed. Assuming our Corp has shares to issue and the Board has voted to do the sale.


Topic Expert
Rex Jackson
Title: EVP and Chief Financial Officer
Company: JDS Uniphase
(EVP and Chief Financial Officer, JDS Uniphase) |

First, given the tax ramifications of owning stock, especially restricted stock, in an S corporation, all else being equal I support your decision to change from an S-corp.

Second, I assume you do not actually intend to "sell" the stock to the key employee. This would require the employee to pay cash into the company (or take a loan, which can also get complicated) and then be subject to repurchase rights in accordance with a vesting schedule.

Third, I highly recommend that you not look at this issuance as a one-off. Assuming your company is on a good trajectory, you will likely want to do this again, and consistency and efficiency are big virtues.

So, the best course is to establish an omnibus stock plan. It is typical for the Board of Directors of a normal C corporation to establish an equity plan under which the company may issue one or more of incentive stock options, non-qualified stock options and restricted stock. Assuming you have the shares as you suggest and convert, the Board can adopt a plan, and then you can issue restricted stock to the key employee with a vesting schedule, which would typically be over a 4-year period, with the first installment vesting at the end of the first year, and subsequent vesting either annual or quarterly thereafter.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

Rex's response is thorough and accurate. I would only add that the executive receiving the restricted stock award should be advised to speak with an independent professional tax advisor about the appropriateness of filing an 83(b) election. That election can change how the taxation for the executive is handled but its usefulness will depend upon the executive's personal financial situation. The election must be filed with the IRS within 30 days of the grant approval, so do not delay between the board's approval of the grant and the notice of the grant to the executive.


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