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CalAttorney2
CalAttorney2, Attorney
Category: Business Law
Satisfied Customers: 10244
Experience:  I am a businesses law attorney, with experience advising and representing owners and investors.
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A 30% owner of a small corporation has been taking his salary

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A 30% owner of a small corporation has been taking his salary partly thru a payroll service company but the majority of it just thru writing checks thru the check book. He said that he 1099 himself but he did this for five years. I think that it was not only wrong but illegal, was it?
Now he is talking of suing for back salary. My family owns 70% of the business, has not received any money only debt, loaned the company money & was talked into this venture by the 30% owner. Can he really get old (2003) back wages even though the company is not profitable? Thank you!

Attorney William B. :

Dear Customer, thank you for choosing Just Answer. I would like to assist you with this matter.

Attorney William B. :

From your post I understand the 30% owner is claiming money as an independent contractor (using a 1099) therefore his "salary" is a matter of contract. If he does not have a written contract for salary, his claim is under oral contract, the statute of limitations for a breach of oral contract (the corporations "failure to pay him") is 2 years (he cannot claim anything older than 2011).

Customer:

When he and my father bought the business his salary was at that amount. But I was wondering since he split it up that way with 1099 & W2 did he do anything illegal?

Attorney William B. :

It was not illegal, but it may have been a violation of the corporation's governing documents, in which case he may have created an issue with his rights both as a shareholder and as an employee. (By the way, a written contract has a statute of 4 years in California, but an employee's right to wages is governed differently).

Customer:

So where would I find out about the governing documents, by laws? He is not really an employee but an owner of the business, isn't that treated differently?

Attorney William B. :

He is both an employee and a shareholder (I am speculating, but fairly certain here)l. You are entitled to a review of the books - as a 70% shareholder you will be able to get full access to the books, both the governing documents, the financial records, and the voting records, to determine what is going on with the corporation, determine what he is really entitled to, what he has been paid, and how he has been paid.

Customer:

So nothing illegal with spliting up W2 & 1099? I do have full access, he has left. Company is in debt, he ran up a pile of bills. My Dad loaned the company over $150k, and now he want to sue for back wages. My Dad passed away a few years ago & this guy ran it unchecked.

Attorney William B. :

There is nothing wrong with splitting it up. But it makes a huge difference in how he does it.

Customer:

What do you mean how it does it?

Attorney William B. :

First, there is a distinction between a W-2 employee who is entitled to protections and rights under employment law (this is actually much more of an obligation on the Corporation, and a 1099 independent contractor who is responsible for his own taxes etc. and is a contracted entity - he can only claim money owed back 2 years for oral debts and 4 years for written debts under this type of service.

Attorney William B. :

Second, he has to show that the corporation allowed the change, maybe not in its bylaws, but at least in its business records - voting records or board meeting minutes, etc.

Customer:

So he has to prove that his salary could be taken that way? He didn't put that in the board meeting records. But really started doing this after my Dad passed away.

Attorney William B. :

He needs to identify exactly what his losses were (are they non-payment of contract damages under a 1099, or are they unpaid wages under his W2 employee status).

Customer:

Thank you!

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