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How can we remove a shareholder's shares for unpaid taxes?

How can we remove a shareholder's shares for unpaid taxes?

Full question:

I am a shareholder in a corporation in the State of Idaho. I own 10%, my husband owns 50% and another person owns 40%. We are considering taking away his shares because he failed to pay his taxes and now the company is responsible. How can we remove his 40% shares?

Category: Corporations
Date: 04/07/2025
State: Idaho

Answer:

The rights of shareholders are primarily governed by the corporation's charter and bylaws. Corporations must have bylaws that outline how the corporation operates, including rules for corporate officers, directors, and shareholders. It’s essential to follow corporate formalities, such as keeping bylaws updated, as they can be amended relatively easily.

The board of directors, elected by shareholders, has a fiduciary duty to act in the corporation's best interests. If a director breaches this duty, they may be held personally liable for damages. Decisions affecting the corporation must be made at board meetings, which require a quorum to be present.

While a corporation is a separate legal entity and typically protects its shareholders from personal liability, courts may disregard this protection in cases of fraud, illegality, or misrepresentation. If the other shareholder's failure to pay taxes has caused liability for the corporation, it may be necessary to review the bylaws for any provisions regarding the removal of shares. Legal advice is recommended to navigate this situation properly.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

Is a shareholder liable for corporate taxes?

Generally, shareholders are not personally liable for corporate taxes. A corporation is a separate legal entity, meaning it is responsible for its own debts and obligations, including taxes. However, if a shareholder engages in fraudulent activities or fails to adhere to corporate formalities, a court may hold them personally liable in certain situations. It's advisable to consult with a legal professional for specific circumstances.

Are husband and wife considered one shareholder?

In most cases, a husband and wife are considered separate shareholders unless they hold shares jointly. In a corporation, each spouse typically owns their portion of shares independently, affecting voting rights and ownership percentages. However, in certain business structures, such as community property states, ownership rules may vary. Legal advice can clarify specific situations.

What is the 10 percent shareholder rule?

The 10 percent shareholder rule refers to regulations that apply to individuals who own 10% or more of a corporation's stock. These shareholders may have additional reporting requirements and can influence corporate decisions significantly. This threshold is important for tax and regulatory purposes, especially regarding certain corporate governance rules.

Can a spouse be a shareholder?

Yes, a spouse can be a shareholder in a corporation. They can own shares independently or jointly with their partner. The ownership structure will determine their rights and responsibilities within the corporation. It's important to review the corporation's bylaws to understand any specific provisions related to shareholder ownership.

Is a husband and wife LLC considered a partnership?

In many cases, a husband and wife LLC can be treated as a partnership for tax purposes, especially if they choose to file as such. However, they can also elect to be treated as a sole proprietorship if they are the only members. This classification affects how income is reported and taxed. Consulting with a tax professional can provide clarity on the best approach.

Are husband and wife considered one shareholder in S corporation?

In an S corporation, a husband and wife can be treated as one shareholder for certain tax purposes if they file jointly. This allows them to meet the shareholder limit more easily. However, they still maintain individual ownership rights unless shares are held jointly. It's advisable to consult with a tax advisor for specific implications.