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socrateaser, Lawyer
Category: California Employment Law
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Experience:  Retired (mostly)
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Im a teacher / founder of a private educational facility that

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I'm a teacher / founder of a private educational facility that is a 501 c3. The school was originally a pre-k program operating as an S-Corp operated by one person. The pre-k program has now been turned into a non-profit, holding the same school name, but now operating as a teacher collective. Recently, the owner of the S-Corp, who remains a member of the teacher collective decided to she no longer wanted to operate as a teacher collective, but wanted to retain sole rights to making decisions about the operations of the school. Does she have the right to do that?

The term, "teacher collective," has no legal meaning. There is nothing in the California Corporations Code which permits an organization called a "collective." There is, however an "nonprofit association," so I'll assume that this is the true organizational structure.

An S Corporation cannot be a nonprofit entity, because profits in an S Corporation automatically pass through to its shareholders.

My point here is that the real question here is: who or what entity owns the assets of this organization (equipment, supplies, leases, intellectual property, enrollment lists, etc.)? And, in particular, who owns the name of the organization? These questions are not easily answered, except to the extent that a particular person may have filed a "statement of authority" for the collective/association with the county -- or registered a fictitious business name. Or, where a certificate of title is necessary to confirm ownership, or a signature on a lease.

Example: Let's say that this S Corp owner has the lease on the facility, and that her corporation owns the computer system with the student information, is the signatory of the business bank accounts. On that basis, the owner can usurp everyone else's authority and simply push anyone who disagrees out. It's the old saying, "The person with the gold, makes the rules."

Now, it's quite possible that the other members of this collective could file a lawsuit for a breach of covenant or fiduciary by the S Corp owner, and then try to prove that the S Corp owner had previously assigned her interests in the S Corp assets to the collective. But, that sort of fact-intensive lawsuit will cost a lot of money. Unless everyone groups together, hires a lawyer and pushes back in a hurry, the S Corp owner may simply take over by fiat, assuming she controls the financial strings.

Frankly, the issue of the S Corp operating as a 501(c)(3) bothers me a great deal. I doubt that the IRS will permit this to continue for more than the current tax year. It may be that the parties involved simply don't understand the legal and tax issues, so the organization is malformed.

Regardless, if the goal is to prevent the S Corp owner from simply taking back the reins of power, the other teachers will need to either convince the parents to bring their money to a new legal organization created by those teachers -- because as long as the S Corp owner is collecting tuition, then she has de facto control of the school, unless and until a court orders otherwise.

For a civil litigation attorney referral, see this link.

Hope this helps.
Customer: replied 4 years ago.

The organization is no longer an Scorp. It started as that, and has changed it's legal status to a nonprofit organization, for which I did all the paperwork, and all teachers in the collective are officers. All of the assets that belonged to the Scorp are now assets of the nonprofit, including the name of the school. Does she still have the right to do what she did?

It's not clear to me exactly "what she did?"

If all of the assets are controlled by the nonprofit, then the board of directors of that nonprofit, can vote to remove and appoint officers and/or change bank accounts, door locks, computer access, etc. It would be impossible for the S Corp owner to take over, because the directors could simply vote no, and the S Corp owner would have no actual or legal power to make any changes to the school's operation.

In short, if the board doesn't like what the S Corp owner is doing, it can simply "fire" her, and if she returns to the school, some other school officer can call the sheriff/police and have the S Corp owner escorted off the premises.

Hope this helps.
socrateaser and other California Employment Law Specialists are ready to help you
Customer: replied 4 years ago.

Thank you!

You're welcome and good luck.