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Joseph
Joseph, Lawyer
Category: California Employment Law
Satisfied Customers: 4979
Experience:  Extensive experience representing employees and management
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Hi Joseph, I am the President and sole shareholder of an

Customer Question

Hi Joseph,

I am the President and sole shareholder of an S-Corp in California. We have been in business 33 years as a mortgage broker. Because of the recent increase in mortgage rates and the resultant lack of business (I specialize primarily in refinancings - not purchases) the company is no longer profitable and it appears it will be necessary to "close" my business down at the end of this year (unless we have a major interest rate drop which I am confident we will not). This will entail, laying off my one employee and ending my office lease and in effect closing the business down. I would like to keep this S-Corp "alive" in case we do have another move down on mortgage rates in the next year or two but at this time I am in the red each month and it will make no sense to keep the business "active" after the first of the new year.

I have over the years drawn a salary of a minimum of $5,000 per month BUT ONLY DURING THE FOUR MONTHS OF Sept. thru Dec. and I plan to do so the remainder of this year. Any profits at the end of the year, if any, would simply flow through to me personally as a Shareholder Distribution.

I handled my salary this way for several reasons. One, I did not want to burden the S Corp with a salary during the first 8 months of the year (I would simply use my savings from the previous year for my personal expenses). This presented less stress for me in running the business.

Secondly, it is my understanding that in the event I ever needed to collect the maximum unemployment benefits available, the S Corp would have to have paid into the unemployment fund, which we did based on my salary and my employees salary. And I would need to receive approximately $5000 per month for at least 4 months over the last year of employment to be eligible for the maximum UEC benefits.

Please let me know if my understanding is correct. But obviously, my primary question is: Am I eligible for unemployment benefits from the State of California Beginning January 1, 2014, if I "close" my business down effective 12-31-13???

Other facts that you may want to know are as follows. First, I have a large bank balance in the "mortgage broker" S Corp, that consist primarily of Shareholder Distributions (previous years profits) that the corporation has yet to distribute to me personally. Will this have any effect on my UEC eligibility (or do I need to distribute it before the end of the year)?

Secondly, I am also the President and major shareholder of a SECOND S-Corp. This particular S Corp was set up 20 years ago with funds I & my partner/fellow shareholder funded with our personal savings for the sole purpose of buying mortgages and servicing them for our benefit and profit. There are NO EMPLOYEES. All this company does is process the mortgage payments monthly on about 2 dozen loans and distribute the interest income to we, the share holders, in the form of Shareholder Distributions on a quarterly basis - it is simply a vehicle used for investment income.

From what I have read on the EDD site and the Net, it appears that a major shareholder of an S Corp is able to receive unemployment benefits but it is not as "cut & dried" as a wage earner who does not own a company. So like everything legal, the " devil is in the details" and I am hoping you can explain to me if I can move forward with my application for UEC benefits in January 2014 with the expectation of receiving benefits or if there are any issue(s) that I need to consider now and "correct" before applying.

Let me know if you need any other details of my situation.

I look forward to your expertise.

Paul
Submitted: 11 months ago.
Category: California Employment Law
Expert:  Joseph replied 11 months ago.
Hello Paul,

I'm sorry to hear about your situation and hope I can help.

My name is XXXXX XXXXX my goal is to provide you with excellent service today.

Yes, you would be eligible to receive unemployment benefits if you are effectively laid off from your company and are not receiving any income for it, as you are entitled to unemployment insurance as long as you make at least $1,300 in a preceding quarter.

That said, I imagine that EDD may have some questions for you regarding this situation, since it may seem a little odd that you don't receive any salary for 8 months out of the year, and are only receiving this salary for the last 4 months. (If the business were doing bad, the expectation would be that salary is reduced not increased). It would be especially suspicious, if you suddenly stop receiving salary and then immediately file unemployment insurance benefits.

While you technically wouldn't be doing anything illegal, it's likely to raise some red flags. Also, there would be an issue of whether or not you could seek full time employment if you are still operating as president and owner of two S-corps.

You will also have to disclose any and all income that you receive from either S-corp or any other activity to the EDD, including any distributions that you receive from the company.

I really have no way of knowing what EDD would do with your case. You should be entitled to the maximum amount of unemployment benefits, as you would have earned $20,000 in one quarter, which would be the basis for your benefits calculation. Still, EDD will likely look into your application in greater detail since you are not receiving any salary for four months out of the year, and would be receiving this salary seemingly for the sole purpose of claiming unemployment benefits.

But, honestly, I can see of no way that you could somehow make this situation look better, since you cannot go back in time and pay yourself a salary for the preceding eight months as well as the last four months.

All I can tell you is that you should be eligible for unemployment insurance benefits based on the regulations, but I would suggest that you not absolutely count on that happening, especially since there could be an issue even with you remaining president of the S-corps, since EDD would probably consider that you aren't available to accept full time employment

I hope the above information is helpful.

Please let me know if you have any clarifying or follow up questions as I want to ensure that you are completely satisfied with my service. Please contact me first if you are contemplating leaving me a negative rating, as I’ll be happy to continue to address your concerns until you are satisfied with my service.

If not, please remember to rate my answer positively so I get credit for my work. Please also rate me highly (9-10) when you receive your customer satisfaction survey as well.

Thanks and best of luck!

-Joseph


Customer: replied 11 months ago.

Hi Joseph,


 


I want to thank you for your very informative answer and will have no problem rating you a TEN.


 


I would like to ask you some follow up question(s). First let me propose a "new" related scenario and get your response. What if I go ahead and "close my office down" at the end of the year BUT continue paying myself a $5,000 per month salary from the cash reserves remaining in the S-Corp for several months into 2014. If I do this, how many months would you suggest I receive a salary into 2014, so that the "suspicious" nature of my previous years practice of paying myself a salary during the last FOUR months of each year, would not be an issue. OR do you believe this idea has little chance of appreciably increasing the likelihood of being awarded UEC benefits and I should not bother with it???


 


Incidentally, I keep excellent "books" and can easily show in the Investment S-Corp that the only transactions performed on a monthly basis is the posting of two dozen mortgage payments which will take less than a hour of my time monthly. My mortgage brokerage books, will show good income the first half of 2013 BUT they will show VERY little gross income the second half of the year and monthly losses from July thru Dec. In other words I believe it should be obvious by just a review of my monthly P&Ls that the lack of gross income will demonstrate that my time is no longer invested in either of the businesses. What do you think my chances are of convincing them that I CAN and DO have the time to accept full time employment. I should add that it is my intention of finding a new position with another mortgage brokerage firm as a loan officer but this could take some time before I find the right "fit" but I will be looking for work.


 


If I were to be awarded benefits how many weeks are they for and is there a likelihood of receiving "extended" benefits and if so for how long?


 


 


Finally, by any chance are you located in Southern California. It would be nice to know if I ever needed you for more formal legal representation and advice in the future. Also please let me know what areas of law you are experienced in. Do you practice law in the areas of Real Estate, Mortgage Lending, Foreclosure, NMLS, CFPB, etc.?


 


 

Expert:  Joseph replied 11 months ago.
It really wouldn't make any sense for you to get a salary when the business is closed down. I think that that would look additionally suspicious to the EDD, if you are receiving salary when the business is closed and not generating any new income.

I think you'd still have a decent chance of convincing them you can accept full-time employment, but it's very likely your benefits will not be approved until an interview is conducted regarding your position as president of the corporations and owner of them.

Currently, with extensions you can receive benefits for up to 63 weeks. If you are granted an original claim and are actively seeking employment and not turning down ANY offers of suitable employment, you will automatically receive these extensions for up to 63 weeks of benefits. (The number has decreased from 99 to 63, and is possible will decrease with claims started in early 2014 as well).

Here is a link to that information:

http://www.edd.ca.gov/unemployment/Federal_Unemployment_Insurance_Extensions.htm

Thanks for considering me to help you in other areas and for formal legal representation. Unfortunately, per site rules, I cannot give you any contact information for myself outside of the site, and am limited to assisting you ('just answering' your questions) online.


Joseph, Lawyer
Satisfied Customers: 4979
Experience: Extensive experience representing employees and management
Joseph and other California Employment Law Specialists are ready to help you
Customer: replied 11 months ago.

Joseph,


 


Thank you again for all your help. The information and the understandable way you present it has been of immense benefit to me by removing all the questions and "what if" scenarios that have been floating around in my head - now I fully understand what I must do and what my expectation level should be. You truly have provided me a VERY valuable service. I suspect it will not be long until you are too busy in your practice to answer questions on line. "Just Answer" is lucky to have you now.


 


Paul

Expert:  Joseph replied 11 months ago.
Hello Paul,

Thank you for your note, the positive rating of my service, and the generous bonus! It has been my pleasure to assist you and I hope than you will ask for me on JustAnswer should you have future legal questions.

Please request me directly by placing “to Joseph” at the beginning of your question or you can ask a question directly to me through my URL here:

http://www.justanswer.com/law/expert-joepatterson/

When you receive your Customer Satisfaction Survey from JustAnswer, please do rate me highly (9-10) there as well. It benefits my ability to assist you and other customers, and would be tremendously appreciated.

Thanks again and best of luck,

Joseph

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