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Old 05-11-2011, 05:42 PM
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Unhappy S Corp Dilemma in CA

Hi,
My husband and I got involved in a very tiny S corp in CA. The owner needed money ASAP and so I paid him directly to become a majority shareholder (not knowing until much later that he never officially issued us any stock); at the same time, the corp shareholders "voted" my husband in as President (supposedly) - that was all way back in 2003 or so. This company has never made any money - the only reason we do it is to help the community.

To make a long story short, the old owner hasn't been involved in the company since 2003, the company hasn't filed state or federal tax returns since 2006 (we can't afford the $800/year; can't even pay our rent; and we suck at paperwork), I just found out the corp was suspended a while ago (for no tax returns and not filing with the State Secretary), we personally guaranteed the current lease, and I just found out my husband hasn't been keeping the receipts for the monthly draws he's taken for reimbursement.

I don't believe we're technically in charge of the corp (since we were never officially shareholders) or liable for all the debts it's incurred, but since my husband hasn't properly kept tabs on everything, I'm not sure what to do since neither the company or my husband and I have any money to pay for anything... help!! We are good people, but obviously suck at running a business properly. I want out of this nightmare!



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Old 05-12-2011, 02:30 AM
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“My husband and I got involved in a very tiny S corp in CA. The owner needed money ASAP and so I paid him directly to become a majority shareholder (not knowing until much later that he never officially issued us any stock);”---> A corporation can elect to be an S corporation only if it has one class of stock. This is a prerequisite to making the election and cannot be exempted; in fact, for the small business, stock is never actually issued; ownership interest is represented on the books as percentages. As long as there is no distinction in equitable rights between the stockholders (some owners are entitled to be paid before others in the case of liquidation instead of by the percentage of the business owned, for example) a corporation would meet this requirement.
“ the old owner hasn't been involved in the company since 2003, the company hasn't filed state or federal tax returns since 2006 (we can't afford the $800/year; can't even pay our rent; and we suck at paperwork), I just found out the corp was suspended a while ago (for no tax returns and not filing with the State Secretary),”----> I believe that this is a definitely legal or moral issue; the owner did not disclose it to you, even though he had ample opportunity to do so. I guess you may need some legal advice from a tax attorney. As you said, don't forget that at the state level you'll usually have to file a regular state corporate return and pay corporate income taxes. Many states including CA state levy a minimum franchse tax regardless of income or loss. The S corp would owe no federal income tax but are still required to file a return.The S corp. would be required to file a return for CA state where the corporation operates. The S corp has to pay at least $800/ year to keep the corporate charter alive
“we personally guaranteed the current lease, and I just found out my husband hasn't been keeping the receipts for the monthly draws he's taken for reimbursement.”----> Who or what leased the space? That's who is responsible. The S-corp. is separate legal entity distinct from its owners. As the S corp. leased space, then it's the S corp--not any owners or officers--which is responsible. If the S corp doesn't pay the lease, the commercial landlord can't go after the owners, except to any extent they personally guaranteed the obligations. So, the landlord can protect himself by having one or more business owners personally guarantee the business's obligations, which means that if the S corp. doesn't pay, the landlord can go after the owner. Needless to say, S-Corporation, your husband, needs to maintain accurate and meticulous records of income and expenses for deduction on tax return.
“ I don't believe we're technically in charge of the corp (since we were never officially shareholders) or liable for all the debts it's incurred, but since my husband hasn't properly kept tabs on everything,”---->I guess it depends on the situation; your ownership interest is represented on the books as percentages.
I'm not sure what to do since neither the company or my husband and I have any money to pay for anything..”---->This sounds like both a tax and bookkeeping isssue, but I think it is actually more of a money management( internal accounting of the S corp.) issue. I guess you NEED to contact IRS agent nearest your in your local area.



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