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My husband and I are shareholders in an S corp. Together we

My husband and I are...
My husband and I are shareholders in an S corp. Together we own 25% and the other shareholder and his wife own 75%. We incorporated in 2006 and my husband, myself and the other shareholder work at the company. Since we incorporated we have always paid ourselves the same salaries and benefits between the shareholders. It has always just been an oral agreement. The rest of the profits were split between shareholder's percentage. The majority shareholder is now trying to force us out. Is there any rights we have as far as our salaries and benefits?
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Answered in 6 minutes by:
2/19/2013
TexLaw
TexLaw, Attorney
Category: Business Law
Satisfied Customers: 4,430
Experience: Internationational Commercial Attorney
Verified

Hi,

Thank you for your question.

You and your husband are being paid a salary and benefits as employees of the S-corp. The S-corp is controlled by its articles of incorporation, and any by-laws or operating agreements that you have drawn up. Unless these documents state otherwise, the S-Corp is controlled by a majority rule. That means that if the 75% shareholders have decided that they no longer want to employee you and your husband, then the company can terminate you.

However, if your salary and benefits were the subject of a contactual agreement (i.e., an operating agreement) or can only be reduced or changed through a unanimous vote of the shareholders pursuant to the by-laws or other corporate documents, then you have the right to stop the termination by suing for breach of contract or for breach of the corporate regulations.

Finally, regardless of whether the 75% shareholders terminate you, they cannot force you to give up your shares.

I look forward to hearing back from you.

-ZDN

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Customer reply replied 4 years ago

So an oral agreement on compensation will not hold up even if that is what we have done for the past 6 years.

Generally oral agreements are not enforceable if they are for a duration longer than one year. However, even if you could argue that the term of the agreement was yearly and was automatically renewed through consent, the fact that it is not written means that the 75% shareholders have a right to amend the agreement and change the terms by virtue of their percent ownership.

Are you certain there are no emails or some sort of writing which would contain the terms of the agreement between you all?

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Customer reply replied 4 years ago

No stupid of us it was built on trust. We are afraid now that if he fires both of us then he will raise his salary and benefits and reduce all profit and we would be left with nothing.

Well, if he does that you can sue him for breach of fiduciary duty. As the majority shareholder, he has a duty to the minority shareholder to ensure profit to the shareholders. If he did something like this (which I wouldn't be suprised, given the fact he is trying to push you out), then you could definitely sue.

This really sounds to me like you ought to consult with a local attorney for a closer evaluation of this case. While I believe you have a real uphill battle in front of you, it would be wise to seek out legal counsel so that you are prepared for any potential lawsuit you may need to file if the majority shareholder does something illegal.

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Customer reply replied 4 years ago

Thank you...

I hope this works out for you. Good luck.

-ZDN

TexLaw
TexLaw, Attorney
Category: Business Law
Satisfied Customers: 4,430
Experience: Internationational Commercial Attorney
Verified
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TexLaw
TexLaw
TexLaw, Attorney
Category: Business Law
Satisfied Customers: 4,430
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