Role of Tax Records in Shareholder Disputes | Franchise Law Blog

Role of Tax Records in Shareholder Disputes


Tax Records and Your Shareholder Dispute

So you may have come to the realization that a dispute with your fellow shareholder and partner is either enivetable or may already be full blown. Chances are that your partner may have been in control of the corporate records and he or she may possess more information regarding the distributions that have been paid to each of you and certain expenses that he or she may have been taking from the company.

So Where Do You Start?

One of the first items that your shareholder or partnership dispute lawyer will ask you about and review will be the corporate tax returns for your business. While tax returns contain only financial summaries they can be important for identifing disparate distributions between partners In particular:

Disparate Distributions – One key issue that will be evaluated will related to the compensation that you have received relative to your partner. In the typical 50/50 partnership senario both partners should share equally in both their compensation and their shareholder distributions. However‚ this does not always turn out to be the case (i.e.‚ the controlling partner may have taken more than you) and the corporate tax return may alert you to this disparity. For typical  “S” election corporations the corporate tax return should include a Schedule K-1 that‚ essentially‚ is a running tally of the equity interests of each shareholder. The capital balance for each shareholder (assuming equal partners) should be equal and if they are not this may be one important clue about a disparity and potential misappropriation.

Keep in mind that the corporate tax returns and the Schedule K-1 is a starting point and the detailed accounting records (quick book files) should contain additional details‚ i.e.‚ are there recurring personal expenses that your partner paid through the company without you knowing about them?

Learn More

To learn more about shareholder misappropriation‚ how to uncover it and the steps available to you‚ order a complimentary copy of my book “The Partnership Dispute Guide” and learn about other Factors to Discuss with your Partnership Dispute Lawyer. Also checkout this video to learn more about Shareholder Minority Rights.

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Category: Partnership Disputes

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