Should I get out of this S Corp?

October 30, 2009 2:04 PM

Should I get out of this family owned S-Corporation?

My father's business is about to shut its doors for good. About a year ago, he proposed creating an S-Corp holding company to take over the intellectual property related to his life-long work. The IP is under his name personally, and not part of his company. His intentions are to give me and my siblings this IP to potentially create income from licensing the rights to use the IP.

I was hesitant to initially start the S-Corp, mainly because I am not a business man, nor is my father (he used his employees and lawyers for this type of stuff). I talked to a lawyer to find out how safe I was from any problems that may occur from being the president of this holding company (e.g.; being sued, etc.). What really worries me is that I will fail to submit some important document to the state or feds, resulting in some big fines that I have to personally be accountable for.

I was able to avoid preparing taxes with the state and feds, because the holding corp has not yet to receive any money or pay any person any money. (I am the only member so far.)

My question is, should I worry about being fined, being sued, failing to accomplish some other requirement unintentionally? You may ask, why I would even think about hanging on to it if it makes me so stressed out. Well, there is a slight chance that it does actually make money. At that point, I would hire a lawyer to take care of the paperwork. Until then, I have no extra cash to do so. Also, I would never hear the end of it from my dad if I dissolved the company.

Another follow-up question... Should I decide to do so, how hard is it to dissolve an s-corp, or transfer it to another person?

posted by Swede78 to work & money (8 comments total)

You should seek an attorney's counsel for these types of questions, not Metafilter.

That said, S-corps are fairly common in the US, and they pass through income to the shareholders, which, in this case, sounds like you.

Further, the notion of establishing businesses to profit off intellectual property is not a new one.

There are lawyers and accountants well-versed in these types of business structures, whose services you can employ to insure that you don't miss filing deadlines, along with all the other administrative responsibilities that come with owning a stake in an S-corp.
posted by dfriedman at 2:09 PM on October 30, 2009

IANYL, and this is not legal advice. Do be aware that ignorance of the law is not an excuse and will not immunize you from liability. If there is a filing or tax or other requirement to which you or the S corp is subject and you don't comply you could very well be subject to personal liability. You and the company each should have lawyers. If you can't afford a lawyer, you should ask your father to pay for one, if he's so keen on the S corp idea.
posted by Admiral Haddock at 2:12 PM on October 30, 2009

See also a primer on patent portfolios, intellectual property valuation, and S-corps.
posted by dfriedman at 2:13 PM on October 30, 2009

IAAL but you are not my client.

I think to increase your comfort with what you are getting into, you'd want to identify who's on your "team". You say your father used his employees and lawyers for "this kind of stuff". In the scenarios you and your family are envisioning, who will you be able to talk to about "this kind of stuff". How much can you use your father's lawyers and accountants (without incurring costs). (As Admiral Haddock points out, some scenarios may require you and your father to have separate lawyers; but he may still be able to be able to help you pay the bills.)

Don't get the liability/lawyer-side of things confused with basic accounting housekeeping. Many very smart people have an accountant help them manage taxes and state registrations for their small businesses / holding companies. Even ones with no income. Does your father expect you to pay for such accounting fees and such out-of-pocket, or could you get him to pay as part of the transition / transaction setup?

You say you spoke with a lawyer about liability issues, but your question here indicates that you were either unsatisfied with the scope of the answer, want a second opinion, or don't think it's worthwhile to pay the lawyer to answer these questions for you. :) The problem with asking random people on the Internet for legal advice is that specific facts can get in the way and change the end result. IP licensing when done right is usually pretty tame, but if we're talking about licensing a patent portfolio of something phenomenally dangerous versus something tame? Yeah, that all matters.
posted by QuantumMeruit at 3:03 PM on October 30, 2009

THere are services that will register with the state for you and of course you can hire an attorney and accountant. It would depend on the value of the IP. IF you are going to make enough to cover professional fees and then some, I would do it. I would do it if it was a breakeven because it was my father's IP, but that is an emotional decision rather than a financial or business one.
posted by JohnnyGunn at 5:03 PM on October 30, 2009

A decent accountant won't break the bank for initial consultation on this stuff. While not an S-Corp, I was able to get everything setup for my LLC and my accountants bill (which includes doing my taxes) will likely be under $200 at the end of the year. If you can't afford that between everybody involved, then I think you have bigger issues and should focus on those until you can because an accountant is kind of the bare minimum to get started with something like this.

They can advise you of everything you need to file paperwork wise and when you need to do it by (often times they will fill it out for you to send). If you are concerned about the personal financial risks, an accountant can often advise on that as well but it would also be smart to talk to a lawyer.

When researching on the internet, please keep in mind that a large part of taxes/forms you need to fill out will be dependent on the state you live in and contacting city hall can at least start you down the right path.
posted by Elminster24 at 9:21 PM on October 30, 2009

What state are you in? If you are in NY, I can recommend an attorney who is also an accountant. He is like two mints in one, with very reasonable rates.

But nthing the recommendations to get an attorney or at the very least an accountant. My S Corp had to file its tax forms even though we did not make any money the first year, and there is an annual fee we have to pay to the state. Don't assume that you don't have to file or that you don't owe anything just because there have been no transactions with your company yet. Consulting with an accountant can help you straighten that out.

And if you can't afford the attorney or accountant and your father does not want to help with those costs, then I'd get out of it and let someone else in the family handle it. Just what I'd do if it were me.
posted by bedhead at 11:47 PM on October 30, 2009

Do be aware that ignorance of the law is not an excuse and will not immunize you from liability.

This is exactly why I'm concerned.

You say you spoke with a lawyer about liability issues, but your question here indicates that you were either unsatisfied with the scope of the answer, want a second opinion, or don't think it's worthwhile to pay the lawyer to answer these questions for you.

Yes, I spoke with a lawyer about personal liability, which I believe he answered adequately. I understand that I will not be personally liable for the company's financial losses. But, he did explain that as an officer, I am liable for any fraud or failure to comply with the law, etc.

So, I appreciate the responses given here. I'm not exactly sure what I was trying to get from posting this. I guess if everybody said "GET OUT NOW!!!", I would probably go ahead and do that. But, most of you suggest the lawyer/accountant route, which I know would be the best way to go. My problem is that my dad is having a lot of financial problems right now, so help from him is not likely. I agreed to this more to satisfy him, with very low expectations of seeing any kind of income. What I didn't know getting into this was the stress I'd have worrying that I'm not doing something correctly.

To answer bedhead's question, I am in IL. I was contacted by the State regarding tax forms. And after explaining the situation, he said that he would excuse the corp from filing for taxes until anything changed (start earning an income, pay people, etc.). I have this in writing too. I don't remember the exact terms discussed, as this was a year or so ago. So, as far as I know, I'm okay right now. But, that's the thing, as far as I know isn't very far.

Again, I appreciate the comments. And I will discuss the options with my dad. He is aware of my concern. Maybe it'd be best to dissolve the corp and start it up again when and if it looks like things will actually start happening. (This corp has done nothing for a long time now.)
posted by Swede78 at 5:49 PM on November 1, 2009