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I have a corporation and my Director who owns 10% of my corporation,

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I have a corporation and my Director who owns 10% of my corporation, but I foumd out that he has a state tax liability of $27,000. He had a 19% ownership in our Company last year, but this year we reduced it to 10% ownership. We gave him ownership because he incorporated his contractor's license to be used for our Corporation. (The rule is that the licensed contractor must have 10% ownership in the corporation.)

He is not on the payroll, but we paid him 19% of our business profit for 2011 (less than $2600). This year he only has a 10% Ownership and we paid him $5000 for 2012.

He just received a California State Tax lien of $27,000. If our "S" Corp. had a profit for 2012, does that mean the Corporation runs the risk of having the State tap into our funds to pay for his past State Tax debt because he owns 10% of the "S" Corp?
Submitted: 1 year ago.
Category: Business Law
Expert:  Thomas McJD replied 1 year ago.
Hi, I will be happy to assist you, and it is my goal to make you a very satisfied customer! This may take a few minutes, so thanks for your patience.

The state could only control his 10% owner interest and be entitled to anything he would be entitled to. If he has no authority to control distribution of assets/profits, then they can't do that on his behalf. However, if you make a distribution to him according to the bylaws of the corporation, then they would stand in his shoes to receive that distribution. The time this type of situation becomes a real concern is when the shareholder owing debt is a controlling shareholder.

The following link is to a website that provides a pretty good summary of what the risks are to having a creditor get a judgment against a shareholder and attach his/her stock:

http://mathieuranum.com/test/

Here is a quote of the summary provided:

"If you own shares in a ... corporation, your shares may be attached and sold by your creditors following a judgment .... In such cases, the creditor ... steps into your shoes and will have all of the rights you had as a shareholder including voting the shares (thereby influencing appointment of directors and operating issues), receiving dividends, the right to accountings and inspection of books and records, and the ability to bring shareholder derivative actions. In short, the creditor may (depending on the size and rights of the shareholding) obtain significant control over the company, and, because the shares are assigned to the creditor, he receives the shares in perpetuity. In closely held companies such a result can be highly destructive to the business and may ultimately result in its liquidation."

Again, though, when it's a small minority shareholder, the chances that the creditor can cause any significant damage is drastically reduced. However, it could affect your business if the stock is taken out of the hands of the licensed contractor (causing you to have to bring someone else in that is licensed).
Thomas McJD, Attorney
Category: Business Law
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Experience: Experienced in Corps, LLCs, Partnership, etc.
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Thomas McJD
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Experienced in Corps, LLCs, Partnership, etc.