S Corp Help?

[ddoshan]

Admittedly weak on S corp returns only have done a few over the years. Client came in who is not a stockholder / owner in the S corp but is an investor in the company. I don't see any way to for him to be assigned any of the income or losses of the business via the S corp return and K-1. He said they had agreed that even though he is not a stockholder owner he would receive 331/3 percent of any profits or losses.
The only thing I can think of is that he would or could be paid dividends somehow.

Another part of the equation is that he has done a lot of work for the company. I suggested that probably they should be paying him a wage for his work which they do not. But he states that they agreed to the 1/3 split above of any profits or losses.

Frankly am lost? Any comments or suggestions.

[Burke]

If they had an agreement that the profit/loss would be split 3 ways, then he should receive a K-1 showing that split of income and deductions every year. That agreement should be in writing. Have him contact the person/firm who does the SCorp's tax return. He would have basis as an investor, and would have to track that.

[ddoshan]

He is the one who is doing the S Corp return and later found out he is listed as the Pres. of the company. Guess I am not to swift as I can't see on the K-1 where someone who is not a stockholder (he owns no shares) in the S Corp can be assigned or allocated any profits or losses.
K-1 is for shareholders share of income etc. He is not a shareholder. Appreciate the help and advice but guess I can't quite understand things.

[MichaelG]

I think the S-Corp would have a hard time arguing that he isn't an employee. Sooner or later a state unemployment or Workers' Comp audit will catch up with them.

Until they treat him as an employee or make him a shareholder, I'd ask why the corp hasn't issued a 1099-MISC to him. It doesn't matter how they agreed to calculate his compensation, he isn't a shareholder - so no K-1. And if not a W-2, then they'd better do a 1099. And he's stuck with S.E. tax on the whole amount.

[Roberts]

He's an investor but he's not an owner?
Did he lend them money or did he invest it?

Typically, if you invest money and own a specified share of the profits, you are an owner. You may not have voting stock but I'd call you an owner. My opinion could be 100% wrong.

[Jiggers]

He's an investor but he's not an owner?
Did he lend them money or did he invest it?

Typically, if you invest money and own a specified share of the profits, you are an owner. You may not have voting stock but I'd call you an owner. My opinion could be 100% wrong.

I agree. However, if this is an S-Corp, there cannot be two classes of stock: Voting and non-voting.

[ddoshan]

He did invest in the company and in fact did various work for the company. They made him President but according to him and the papers he had he is not listed as an owner or shareholder in the company. Just some agreement the 3 of them made where apparently when they set up the company they agreed that he would get 1/3 of any profits or losses. The business will have losses as this was their first year and the expenses outweigh the income they have taken in.

I did mention to him that it seemed to me that he should have been paid a wage or salary. But that I didn't see how any of the losses for 2012 could be allocated to him.
Again admit I am no S Corp expert. I think he is concerned now that the business will show losses that he will not be able to have any allocated to him.

[Jiggers]

I guess the best advice is for him to see an attorney. He has a major problem.

[ChEAr$]

Simple. If not a stockholder, he gets no K1.

If he worked in and for the corporation, he's an employee and should receive a reasonable wage. As for his investment in the corporation, it should be treated as a loan he should be paid interest on that loan. Both these items may not total 1/3 the profits before salary and interest, but allocating the rest to miscellaneous on a 1099misc is also wrong.

If he has no written evidence of the initial "investment" with provisions for the nature of his return on investment, the nature of those payments are at the discretion of the board of directors.