S Corpation partnerships

March 4, 2006 4:37 PM

I own 5 % of an S coporation... Two other people own the rest plus from my understanding there is a certian percentage left open for future partners / growth .. etc. One of the owners is in the hospital and may be out of the picture for quite some time (possibly even years).. his mother the other owner is meeting with the account next week to talk about changing the status from a coporation to a single owner.. to save costs while hes away and to move the business (an e commerce site) to a someone "inactive but cutting even" situation. They want me to continue to do the web work which is why I own 5 % to begin with... but want to just "pay me" -- What is the process involved with this and can they change the company on such a fundamental level like that?

I do not want to loose my 5 % and to this point i have not been paid anything for my web work ( i have created the site, help with the affiliate marketing eprogram and other odd thigns.).. I've gotten a hundred here hundred there for some graphic work for the advertising but no payments to me have been made in regards to the acutal site. I do not want to be "paid" I want to keep my stake in the company becauase i believe in it... What recourse do I have? Whats your advice? Can they do this? I am sure I will have more infor next week after the owner meets with thee accountant... am I getting worried over nothing? Will the account just tell her thats not feesable... etc etc etc ?? Thanks ...

posted by crewshell to law & government (12 comments total)

These questions can really only be answered by reference to a shareholder's agreement. Is there one? If not, the default share ownership rules of your state will apply. What state are you in -- or more importantly what is the S-Corp's state of incorporation? The rules regarding minority ownership protection in the absence of a shareholder's agreement vary a bit from state to state.
posted by The Bellman at 4:44 PM on March 4, 2006

Did you sign an operating agreement or any other form of contract when you were given this 5%? Otherwise, I'm not sure how that's at all official.

If you did, there should be some recourse for her buying out your 5%. There should be a specific price related to the total business, and she should pay it. Since she's the majority stakeholder, I do believe that she has this right, although I'm not a lawyer, nor am I so familiar with S-Corps. (I own an LLC.)

Either way, you may have some legal recourse since you haven't apparently been paid much of anything. Have you received 5% of the business' earnings since you began? Are you the only one making it work? What is she bringing to the table?

You need to discuss your concerns with her, but perhaps before that, with an accountant or better, a lawyer of some sort, especially if there is some actual money at stake.

I don't believe she can simply transition your ownership away from you. You own it. She needs to pay for it.
posted by disillusioned at 4:45 PM on March 4, 2006

See a lawyer immediately!
posted by Ironmouth at 4:54 PM on March 4, 2006

They can't take away your 5% unless you allow them to. If they want to be a sole propriatorship, they'd have to buy you out of your 5%. Did you pay anything for your stake or is your work considered to be your investment?

Also, as an owner, you take some risk. If the business goes well, you do alright. But if it doesn't go well you may go for long stretches without being paid. If the business is making money and they're givng you nothing, that's a problem. But if y'all aren't making money and she's fronting money to keep it afloat, you have to see things from her perspective too.

I don't know the nature of your relationship with these folks but it's best to communicate your feelings and concerns completely and even write down conversations so everyone is always on the same page Lack of communicaton/understanding is the problem in the vast majority of these situations. Only a fraction of the time to people really want to dick each other.
posted by b_thinky at 4:58 PM on March 4, 2006

Seriously, if you are at all worried about this issue you need to shut down the computer right now and go find a lawyer to talk to.
posted by pwb503 at 5:22 PM on March 4, 2006

I'd love to speak to a laywer but i don;t have the income to get that done. The company as it stands now took at lose of 37k last year... so we aren;t currently bringing in a profit, but I forsee that changing in the future. I was told that work along could not be considered enoguh to have a stake in the S corp so I had to "buy" my 5 %, it came out to be something very small 365 or so which they gave to me for my work and i turned around and used to pay for my porition. We do have an agreement for the 5 % and its signed. I am going to talk to her this week and see where we go...
posted by crewshell at 5:59 PM on March 4, 2006

They can't take away your 5% unless you allow them to.

The remaining 95% ownership of the company could agree to sell the assets of the company to themselves and create a new entity that does not involve you. You end up owning 5% of nothing which is effectively the same as no longer being involved.

If they want to cut you out of ownership, you should be happy that they are willing to pay you a wage for work moving forward. By all means, attempt to get some cash for the ownership stake they are destroying, but beware that you have almost no power in the situation. Quickly look for some new clients to work for.

It is only worth seeking the advice of a lawyer if the company in question has any assets. If the company only has a website and a few hundred dollars in its account, the lawer can at best recover a fraction of that for you. The cost of a lawyer will easily exceed the potential recovered assets. If the company had revenue, but that revenue was mostly due to work actively done by the guy in the hospital, then you can't expect to recover much from future earnings, as long as this guy is out of commission. If the company has enough assets that your ownership fraction of those assets will likely exceed the cost of legal fees, then it could make sense to contact a lawyer and consider taking action.

Don't underestimate the value of just playing nicely and taking what you can get (but, obviously, don't overestimate it either).
posted by b1tr0t at 6:07 PM on March 4, 2006

The company as it stands now took at lose of 37k last year... so we aren;t currently bringing in a profit, but I forsee that changing in the future. I was told that work along could not be considered enoguh to have a stake in the S corp so I had to "buy" my 5 %, it came out to be something very small 365 or so which they gave to me for my work and i turned around and used to pay for my porition.

So you own 5% of a $37k debt? And the owners want to liquidate your 5% holding and pay you cash for future work? SCORE!

Seriously though, what chance do they have of making any money? Is the guy in the hospital an important part of the company?

You can't pay rent with stock options (or equity in a private company), go for the cash if it is available.
posted by b1tr0t at 6:11 PM on March 4, 2006

If they own 95% they can pretty easily find ways to either divest you of your 5% or force you to sell out, or just abandon the company and leave you with 5% of a hollow shell.

You recourse is in the courts.

As the people above said, you should be happy they're not screwing you over.
posted by falconred at 6:20 PM on March 4, 2006

Estimate the hours you spent earning that 5%, and ask for a (small) percentage of that at the new salaried rate.

As a minority shareholder in a privately owned company you have just about no leverage. Even if there were "profits", the majority shareholders could just assign that income to themselves as salary and leave no corporate profit.

Use the "or I'll walk, leaving you this mess to clean up" gambit in an understated way, laced with "I want this to work, I want this to be fair for everyone" talk.
posted by StickyCarpet at 6:37 PM on March 4, 2006

well I am the backbone of the internet pressence for this site / company. I built the site completely on my own, i could if I wanted completed destroy the entire site at well (not that I would do that) and I do want to play it nice and see where this goals but I Want to be a part of the future of this company because I believe it will take off its jsut going to take time, and yes I am getting a 5 % share of the 37k lost last year and for me this is GREAT because its a tax right off (i put nothing but time into that amount) so for me its a win win since i made a decent amount of 1099 income last year that i need right offs for.

Hopefully we can work something out... thanks for the info guys.
posted by crewshell at 2:00 AM on March 5, 2006

The remaining 95% ownership of the company could agree to sell the assets of the company to themselves and create a new entity that does not involve you. You end up owning 5% of nothing which is effectively the same as no longer being involved.

Wouldn't he legally own 5% of whatever the new company agreed to pay for the existing company? And if they decided to sell company A for something like $1, wouldn't he have some legal standing to take them to court? I don't know the laws here- but that's why you hire a lawyer!

i could if I wanted completed destroy the entire site at well (not that I would do that)

Wait, why rule that out? You wouldn't want to do anything drastic without talking to a lawyer first, but why remove the ammunition you possess? If I'm understanding, you're a 5% owner and have even absorbed 5% of the losses out of your own pocket... and yet you run the whole frickin' company, you built it entirely on your own. And you're worried that they'll basically rip you off of your stake, right before the company is poised to actually start turning a profit.

Seriously- consult a lawyer: there is ALWAYS money for a lawyer, period, if there is money involved. You can at least get a free/cheap consultation. And you should at least take steps to ensure you have backups of everything necessary to rebuild the site, and the ability to flip a switch at any time that will shut down and erase the entire site.

If you do nothing, or claim you don't have money for a lawyer- you deserve nothing.
posted by hincandenza at 8:59 PM on March 5, 2006