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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10098
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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A corporation consisting of two parties is established and

Customer Question

A corporation consisting of two parties is established and party A borrows $100k and party B agrees to be liable for $50k of it. $60k is spent on operations, inventory and salaries. One party is leaving the corporation and the corporation is now valued at $25k (inventory and cash on hand). If party B leaves how much liability does party B have to the corporation?
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

Hi,

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The cash was borrowed FROM the corporation?

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(Guessing so from your question, but wanted to be sure)

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Let me know and we can go from there

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Lane

Customer: replied 1 year ago.
No. The cash was borrowed by party A personally (loan on a piece of real estate party A owns).
Expert:  Lane replied 1 year ago.

Ok first, (probably stating the obvious), if there was no shareholder agreement, then B really owes nothing, (legally).

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From a doing the right thing perspective, party B has two issues (1) still being liable for 50% of WHATEVER the balance of the loan is ... (which should be kept separate from how the proceeds were spent), AND

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(2) HOW he leaves the corporation... this is typically done through a buyout ... if he simply walks away, he's abandoning ub a physical sense, but if he's a shareholder, he's still responsible to for tax implications, becasue he's still an owner

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He could always gift his shares to party A

Expert:  Lane replied 1 year ago.

If you don't dissolve (which would be treated as a sale for both parties from a tax perspective) there can be fines and penalties

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Various government agencies expect you to file required periodic corporate forms on time unless the corporation is officially dissolved.

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IRS can start to levy non filing penalties for corporate tax returnseven if the business has stopped operating. The same is true for state tax agencies and the state agency that oversees corporations, usually the secretary of state's office, both of which require the filing of an annual corporate report.

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Is that what's going on here?

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Or will the corporation keep operating?

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Also is this an S-Corp? or a C-Corp?

Customer: replied 1 year ago.
The corporation is going to be dissolved. It is a C-corp, I think.
Expert:  Lane replied 1 year ago.

That's good, many don't sweat the details and it comes back to haunt them about three years later when the taxing authorities are getting close to the statute of limitations for assessing a penalty ... and by that time you already have them piling up

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But back to the question ... so sorry, but unless there were shareholder agreements, he really doesn't have any liability TO the corporation but WILL, again, have a gain/loss on dissolution. (and the corporation will as well if it's a C-Corp)

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Hope this has helped to clarify

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Lane

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Customer: replied 1 year ago.
Thanks.
Expert:  Lane replied 1 year ago.

You're very welcome

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If this HAS helped, and you If you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Thank you,

Lane

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