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What are our rights as S corp minority shareholders?

My sisters and I were recently notified by a half-sister that we own 20% of an S-corp through our father who has passed away. My half-sister and her husband want to buy our shares (that we didn't know existed for the past 14 years),and offered us $54,000 total. We told them before we can make a decision that we will need the corporation's tax returns for the past several years and their financial records. So far they have given us the 2011 and 2010 company tax returns. What we've seen is that they are paying themselves $180,000/year, paying their five employees a total of $160,000/year, and retained around $10,000 in company net profits. They didn't make any shareholder distributions as far as we can tell. This all seems incredibly unfair to us. My father has been dead for the past 14 years- why did they just now tell us? And why are they paying themselves such exorbitant salaries while retaining so little for the company? The tax benefits they would get by giving themselves smaller salaries and taking draws from the company would be significant--so it seems to us as though they are purposely trying to keep us from gaining any money from the company.

Does anyone have any advice for my two sisters and I? We are kind of at a loss of what to do....

Update:

Our 20% share was owned by a trust fund set up by our deceased mother, and we just gained access to the trust. Our trustee was my mother's sister who doesn't have any real knowledge about trusts, taxes, etc. Apparently my half-sister had given her an envelope containing K-1's every year, but my aunt didn't know what they were and didn't do anything with them. When my sister's and I asked her about this, she said she remembered receiving them, and brought us some unopened envelopes. So figuring all that out is another aspect of this. The trust never filed tax returns, and so those K-1's haven't been reported by us at all. As far as I know though, my aunt never received any IRS notifications.

So technically we're required to report income from a company who has never distributed any to us while the majority owners receive $180,000 salaries. This all just seems so unfair....Could this be a case of breach of fiduciary duty, since they are obviously act

Update 2:

If the S Corp should have been terminated and wasn't, what does that mean to us and the majority shareholders now?

2 Answers

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  • Anonymous
    9 years ago

    Your story doesn't make sense. S-corporations are pass-thru entities. Whether there are distributions of money or not, each shareholder has to report any income.

    If the S-corporation has been in existence for 14 years, it has been required by the IRS to issue schedule K-1s to each shareholder for each of those 14 years. If you didn't get the K-1 and didn't report the income each year, the IRS would have been contacting you with a tax bill for under reported income. (You can use IRS form 4506-T to request your income statements for the past 10 years.)

    While it's possible the S-corp had losses, the IRS tends to investigate continued losses. It doesn't seem likely that they paid themselves a year end bonus that magically made the net profit $0 each year.

    "retained aroung $10,000 in company net profits." S-corps don't actually have retained profits--as the profits have to be passed through to the shareholders for their income taxes.

    Edit: so the income went to a trust? In order for that trust to be a shareholder in the S corporation, it has to be a grantor trust. A trust set up by your deceased mother qualified while she was alive and for 2 years after she died. After that, the IRS would argue that it wasn't a grantor trust anymore and the S-corp status should have terminated.

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