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Is there a way to terminate my ownership in an S-Corporation without my partner's involvement?

Somerville, MA |

I am part of an S-Corp for which there are two officers, myself and a partner. Two years ago our partnership ended badly. I own 40% of the shares and he owns 60% of the shares. He is NOT paying me dividends on any profits the company may be making. I believe that he will not terminate our partnership because he wants me to pay 40% of the tax liability. First, can I actually be liable for taxes even if I am not being paid dividends? And second, is there a way to end the partnership without his involvement? Thank you.

Attorney Answers 4

Posted

You need to see a CPA and a lawyer right now.
You don't pay tax on dividends only in a S-Corp.

You have rights to an annual meeting and rights to see the financial books and a right to dissolve the corporation (which will probably trigger a buy-out offer from the person you describe as a "partner").

I am not licensed in your state. See the other answers to your posting and also use the Find a Lawyer function on the bottom of this page, left hand column to find a local business litigator.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

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Posted

Thank you for your feedback. My understanding is that as an officer/shareholder in an S-Corp you are liable to pay taxes on "company profits". Is this correct? If there were profits, does the company have to pay dividends to the officers/shareholders at least in the amount of taxes due on the profit?

Michael Charles Doland

Michael Charles Doland

Posted

I do not give tax advice. It is my understanding, and please double-check, that whether distributed or not, you are liable on the profits remaining after tax deductions. You need to get a CPA in the loop and tell the CPA if you have been getting a K-1 informational return from the Sub S every year.

Posted

You should also look through your governance documents to determine if there is an established protocol for forfeiting your interest, or for dispute resolution. As mentioned in the prior answer, you have statutory rights that can be enforced also, but check the Bylaws to determine what action you may be able to take immediately.

I would talk to an attorney as soon as possible to make sure that your interests are protected and your liability is limited as much as possible.

Legal disclaimer: I am licensed to practice law in the state of Washington and the answer provided above is for general information purposes only and should not be relied on as specific legal advice. This answer does not form an attorney-client relationship. You should consult with an attorney of your choice to fully advise you about your legal rights and obligations.

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Posted

Thank you for your feedback as well. Our Bylaws simply state that my partner owns 60 and I own 40 of 100 shares. We were a small company, young and naive. There is nothing else.

Posted

S-Corps are a version of a regular corporation (also called a "C-Corp". The "S" refers to a part of the IRS Code - so when a corporation meets certain criteria it can file an application to the IRS for "S" Chapter 'status'. The main benefit an S-Corp gives you is what's called 'pass-through taxation'. Whereas a C-Corp is taxed at the entity level AND employees who receive wages/salary and shareholders who receive dividends are also taxed at their individual tax brackets. So when you say that you are paying taxes only what's distributed to you...you may be running into a serious problem. You should be paying taxes on all revenue (based on your % of ownership) the S-Corp earned in that tax year less expenses, deductions, etc. If your partner is providing you with the proper tax documents BUT not paying you what the tax documents say you received, then he/she could be in real trouble. As for your liability, as far as the IRS is concerned, you've received that money - it doesn't know your partner has withheld it from you - so it will think you owe the tax on it and if you don't pay it, you could be in real trouble. So I would contact an attorney to sort this out asap. You may need a business litigation attorney to sue your partner for fraud, embezzlement, breach of contract, etc.

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Posted

Generally §16.02 of the MBCA states that if you give written notice to the corporate record keeper, you are entitled to "inspect and copy" pertinent corporate records as defined in said act [with some exceptions]. This is known as the shareholder "right of inspection". I would have your attorney prepare the demand letter and then obtain and review all information regarding your matter. Then proceed based on the facts you have discovered, including any wrongdoing if applicable.

We are a Massachusetts law firm that helps organize and operate businesses and estates with trust, respect, and teamwork. This response is based on Massachusetts or federal law, but does not create an attorney-client relationship. This site provides general information. Please contact a lawyer in your jurisdiction for a solution to your issue.

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