Legal Question in Business Law in California

As part of the corporate records, there should be a shareholder register. The transfer is accomplished by recording the change in the shareholder register. HOWEVER, there are preliminary steps before the secretary of the corporation can legally change the register, and those steps depend on which of the three options you mention is the one you chose. Issuing shares requires a board meeting and resolution. The husband granting half his shares requires him to deliver half his shares to the secretary of the corporation with instructions that they be transferred to the wife. Converting all the shares to community property requires surrendering the shares to the secretary with instructions that they be transferred to husband and wife as community property.

I agree, and let me say it another way. There are three sets of records that will be, or may be, required to reflect this transaction. The most obvious one is the corporate secretary's stock-ownership journal or register. It is an important permanent record of the corporation and must reflect the names, addresses and number of shares owned for each shareholder. If share certificates are being issued (not necessary, but customary), the journal must also show the certificate numbers, date and to whom issued, and number of shares represented by each.

The second set of records to consider are the resolutions of the board of directors. If the transaction results in new shares being issued, this should be authorized by board resolution and a copy of the resolution retained in the records of board meetings. No board action is required if the sale is made by a shareholder, as opposed to an issuance of new stock, nor is board action necessarily needed to sell "treasury" stock that has already been issued but is owned by the corporation itself. When new stock is issued, make certain the number of shares authorized in the Articles of Incorporation is not exceeded.

Third, the issuance of new shares will affect the balance sheet. At minimum, it will change the number of shares reported on the "shareholders' equity" line, if not the dollar value. This, however, brings up a related question: What, if anything, will the new shareholder be paying for the shares? It's fine for a spouse to make a gift of shares, but if they are newly-issued shares, it will be the corporation's gift, not the individual shareholder's, if fair value isn't paid.

Maybe no big deal, but lawyers always wince when clients treat their corporations as extentions of themselves.

One other thought is to download the IRS instructions for Form 2553, or call them and ask, whether the addition of a spouse as a shareholder will require filing an amended sub-S form.