S-Corporation, Giving Advice

[geekgirldany]

I prepare an S-Corporation that has two shareholders. One shareholder has been primary contact in regards to all matters that involve the business. This shareholder is wanting to go out on her own due to various reasons with the second shareholder. They are still on speaking terms. I also prepare her personal return. She is asking for advice on how she should proceed.

The last time I had shareholders go their separate ways I was threaten by one of them. It was a big mess and was finally handled by a CPA and lawyer. They did not let me know about the split until time to file the tax return. So I had no involvement in any type of agreements.

I told this client that I would have to think about it but I believe it would be best to close the existing S-Corporation and start a new one.

If closing the S-Corp though, this can get into so many other things in regards to the second shareholder. Customers, debts, assets, etc.

Like I said the last time this happened I was never asked any advice. Now I do not know what to do. I do not want to get into the middle of dispute... if it comes up.

She said she just wanted to know the best way to go out on her own and how to handle it with the second shareholder.

Do accountants usually get involved in such matters? I will advise her to go to a lawyer but how involved should I be in regards to her wanting to leave?

Thank you for any help

[veritas]

You are a tax preparer

That's really the only thing you can advise on.

The rest is between the shareholders.

[ATSMAN]

Do accountants usually get involved in such matters? I will advise her to go to a lawyer but how involved should I be in regards to her wanting to leave?

Thank you for any help

This is a mine field. Be VERY Cautious and CYA.

I had a similar situation 2 years back with a Sub-S that wanted to liquidate and shareholders could not agree on just about anything.

After spending countless unfruitful hours I told them they need to engage an attorney and I will only deal with the attorney to prepare their final 1120S. All my communications with the attorney and owners were in writing.

[geekgirldany]

Thank you both for responding.

I believe I will just tell her the options (close existing, start a new one, or buy out existing shareholder). She can then talk it over with the other shareholder and let a lawyer handle the rest.

Thanks again. I don't want to get into a mess like last time.

[ChEAr$]

Thank you both for responding.

I believe I will just tell her the options (close existing, start a new one, or buy out existing shareholder). She can then talk it over with the other shareholder and let a lawyer handle the rest.

Thanks again. I don't want to get into a mess like last time.

Is the other shareholder also your tax client? If so,that's the only way it could get very messy.

Remember, your tax client as shareholder is the one asking for advice, and this has nothing to do with the corporation itself.

[ATSMAN]

We got to be careful about conflict of interest issues when split up happens (divorce or business dispositions). The moment something bad happens they are looking to point fingers and have someone pay$!! We have to CYA.

[veritas]

Of course

had they a buy-sell agreement things might be easier to iron out.

And if they had used a good attorney to setup their corporation it would have been part of the package.

[JohnH]

Once a fellow accountant told me about a corporation client with 2 shareholders who got at odds with one another and couldn't figure out how to split up the business. They wrangled and argued for weeks, all the while the business was suffering. They kept trying to draw him into the argument and to form alliances with him. He finally told them to get out of his office, either by going somewhere else or getting a lawyer involved.

So they called a lawyer, who told them to each come to his office with a sealed envelope at the first meeting. Inside would be written two figures - 1) the figure they would pay to acquire the business and 2) the figure they would accept to sell the business. Both had to agree to be bound by the conditions before the lawyer opened the envelopes. If either accepted the other's offer, the deal was done. If both rejected the other's offer, then they would negotiate from there. I thought it was a great way to start the process.

[DTS]

Once a fellow accountant told me about a corporation client with 2 shareholders who got at odds with one another and couldn't figure out how to split up the business. They wrangled and argued for weeks, all the while the business was suffering. They kept trying to draw him into the argument and to form alliances with him. He finally told them to get out of his office, either by going somewhere else or getting a lawyer involved.

So they called a lawyer, who told them to each come to his office with a sealed envelope at the first meeting. Inside would be written two figures - 1) the figure they would pay to acquire the business and 2) the figure they would accept to sell the business. Both had to agree to be bound by the conditions before the lawyer opened the envelopes. If either accepted the other's offer, the deal was done. If both rejected the other's offer, then they would negotiate from there. I thought it was a great way to start the process.

Great story!

[geekgirldany]

That is a good post John.

Only one shareholder is also my client for individual tax preparation. It would be even worse if I was doing the others personal return.


I said I would never take on another 2 shareholder S-Corp but this is a very good client.