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I own 35% of a family business. I resigned from the company but still own 35%, should I be receiving 35% of the profits of the company? It is a small business and they are refusing to buy out my shares at this time. It is an incorporated company but I don't know if it is C or S corp and I reside in the US

  • Did you ever receive a form K-1 to file with your tax return in any given year? What do you mean when you say you "resigned" from the company? – ohwilleke Jan 9 '17 at 18:56
  • I have never received a K-1 from the company. I no longer work for the company but I still have my ownership in the company. – Kel Jan 9 '17 at 19:04
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Shareholders of corporations receive dividends when the corporation elects to pay out profits in that form. So if they pay dividends to shareholders of your class (it is possible to establish multiple classes of shareholders) then you will receive 35% of the dividends paid. But if it's a C-Corp (which it almost certainly is because you claim to have never received a K-1), then the company is generally not obligated to make distributions to owners.

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Though you are entitled to 35% of the profits of the company, a lot depends on what the directors (no longer including you) decide to do with the profit.

  • They may decide to pay it out as dividends, in which case you are unarguably entitled to a 35% share, Since you've received nothing, this is probably not the case.
  • They may be retaining the money in the company (either in a bank account or something like new equipment), in which case the company, including your 35% share, becomes more valuable for when it is sold. (You say the others will not buy you out; can you sell your shares elsewhere?)
  • Most probably, as other answers say, they are managing the business so that it does not show any measurable profit. This may or may not be legal in your State. In favour of it is that the directors are entitled to run the company: against it is that they run it on behalf of the shareholders, not just on behalf of 65 % of them; if they have really decided to give Uncle Fester a 100% pay rise in order to keep profits down, that is probably abuse of their position, and you should consult a lawyer.

Regardless, your first action should be to write to the company (probably the company secretary; definitely not to one of your relatives personally) and ask for accounts of the company, to which you are entitled as a shareholder. Presumably, since you used to work there, you know roughly what the accounts should look like; if not, an accountant can help, and probably tell you whether it is worth engaging a lawyer

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In addition to Feetwet's answer (that you should get a share of dividends), it is quite likely that there will be no profits, because the 65% owners will likely pay themselves just enough salaries and bonuses to take the profits down to zero.

The majority owners of a company is in a strong position to determine the amount of taxable income they get vs. the amount of profit that the company makes, and will arrange that to their maximum profit. For example, a UK one person LLC will usually pay the company director the minimum wage, and everything else is profit, which then is paid out as dividend, because that optimises total tax payments. In your situation obviously it would be different; they would minimise profits because 35% of the profits are yours, and instead pay high salaries even if that means a total higher tax payment.

Even if there are profits, then it is likely that the company has no obligation to pay dividends to the shareholders. If I owned the majority, I'd be tempted to keep all the profits in the company, and when I want to retire, I just stop working but pay myself a salary until all the money is gone. And it may be possible, depending on how the company was set up, that some shareholders would get different dividends than others.

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    The board (or in this case the owners) have a fiduciary duty to all stockholders. Yes, if they are also the managers they can (and they must) pay themselves a salary as managers, but that salary must be in line with the salaries paid to managers in other business. Reducing the profits in this or other way (for example passing personal expenses to the company) would be fraud (although it may be difficult to prove) – SJuan76 Jan 12 '17 at 0:14

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