I have a 50/50 S-Corp with a DBA. We have a trademark. I am wanting out. Should we dissolve or can I just remove myself without future liability? We have only been in business for a year. We do not have any overhead and not much in the bank. I just do not want to be liable for future business if my partner goes forward with the business. How do I remove myself completely from this business?
While I am not licensed in Georgia, your question address central principles and issues of business law and shareholder issues. To cut off any future liability, you cannot simply rely on "removing" yourself. In general, you must take (or have the corporation) take one of several specific actions. The most common actions to separate yourself from a S-Corp and cut off future liability for the corporation's debts and actions are:
Dissolution: You are already aware of this method, but it may not be the most efficient in your case. Additionally, the other 50% shareholder will probably be unwilling to dissolve the S-Corp, since this shareholder wants to continue operating the business. While the business' goodwill should not be much of an issue (since you have been operating only for a year, the other shareholder will not want to incur the expenses of liquidating and winding up your existing S-Corp only to have to incur additional expenses, time and effort in re-incorporating and "re-forming" the business. Under a dissolution you will pay off all of your current creditors and split the remaining assets. The other shareholder will then have to form a new corporation, and spend money and time in transferring or completing an assignment of the trademark, the lease, the bank account and any supplier/vendor contracts. Finally, dissolution will not avoid the most likely divisive issue - what is the fair market value of the S-Corp and your shares? See the link below for more information on Georgia's dissolution procedures.
A buyout: The other shareholder can buy your shares or the corporation on its own behalf, can buy your shares using corporate funds (this is a "redemption"). By buying your shares, the other shareholder assumes not only control but also all liability for the S-Corp going forward. However, based on the nature of your question, I assume you do not have a shareholder or buy-sell agreement - i.e., an agreement that provides when a shareholder must be bought out and/or specifies a purchase price or method to determine a value for the shares. Without a predetermined value or method to determine the purchase price, as 50/50 shareholders you may be deadlocked on the purchase price. As 50/50 shareholder, you may not agree on how to proceed and you could be deadlocked (unless your articles of incorporation or By-Laws provide what to do if there is a deadlock). If you are unable to resolve the deadlock, you have to resort to filing a lawsuit to either determine what is the reasonable fair market value of your shares or proceed with a judicial dissolution of the S-Corp.
Another issue may be that the other shareholder (or the corporation) may not have the money to buy you out. There are several ways to address this problem, but the issues are too complex (and are beyond the scope of this question), but in a nutshell, the two most common solutions to this problem are:
- an installment payment plan: where the other shareholder makes a significant down payment and pays the balance of the purchase price over an agreed period of time (with interest).
- an earn out : If the business has a historically steady and consistent stream of revenue, you may consider being paid a percentage of the revenues and/or profits of the business over time.
For further information and other issues that may address your question, please review my prior answers to related questions. See the links below for the most relevant prior answers.
This answer is for informational purposes only and is not intended to be legal advice nor does it establish an attorney-client relationship. You must consult a local business lawyer to obtain legal advice that is tailored to your circumstances and facts. Good luck to you.
2 found this helpful