No K-1? No Excuse: Business Partners Who Hide Corporate Tax Returns are a Red Flag for Shareholders
As an oppressed minority shareholder, you are most likely entitled to get bought out – that is, paid for your shares. To be awarded that remedy, you usually have to obtain an appraiser and value the shares. But what if the books and records are so distorted and inaccurate that it is impossible to get an accurate assessment of what the company is worth?
In one case, the majority owner was so entrenched in the company, exercising almost maniacal control over the finances, that he failed to file corporate tax returns for six years. Over half a decade without filing a tax return! That was quite obviously not laziness or mere oversight – he was clearly hiding something. The failure to file tax returns could be explained by a simple desire to hide income, with the intended deceived party being the IRS. Or it could be because the majority owner wants to hide what he is doing from his business partner. Or, of course, it could be both.
So, if your business partner tells you there is “no K-1 this year because there was no profit,” run – don’t walk – to a shareholder dispute attorney. A K-1 should be issued even if there was no profit, or even if the company shows a loss. In New Jersey, at least, a shareholder is entitled not just to his own K-1, but to the entire corporate tax return. There should never be a reason not to ask for and obtain a copy.
In fact, there should be no reason to keep yourself in the dark, to be so passive as a shareholder that you do not demand to see financial records every year. The shareholder in the above case was essentially guilted into not pushing for the documents. If the response to your request to see the tax return is “what’s the matter – don’t you trust me?” that’s a really large red flag!
In another case, a minority owner had a sneaking suspicion that certain liberties with the tax laws were being taken. But he did – and said – nothing because he assumed that he, too, was benefitting from such an “aggressive” tax position (that’s what he called the failure to pay taxes). By the time we tried to do anything about it, the company was essentially out of money and bankrupt, and our client’s business partner was essentially penniless and thus judgment-proof.
The moral? It’s your company too. Stay involved. Stay informed. Know what’s going on. Never be so overly concerned about offending your business partner by a seeming lack of trust, that you allow yourself to be gaslighted into staying in the dark. You owe it to yourself and to your company to be enlightened.
Please do not hesitate to reach out to me at dcroberts@norris-law.com.
About the Author – Business Divorce in NJ
David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation, but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.