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Question
I was to receive all interest in our closely held S corp.  Originally my ex held 100 shares in his personal name. We formed trusts in 1998, intending to void the 100 and issued 2 certs for 50 to each trust.  As president my ex never signed the back of cert #1 to void it. He filed an amended financial affidavit in divorce I never saw, the day of mediation claiming he owned 150 shares to my 50.  His attorney prepared a transfer of 50 shares and "all other interest" I didn't question not knowing of the 150 claim.  Tax returns in the past were filed in error showing him as 100% owner. He left 8.00 in the bank while hiding over 100g in unpaid bills, deferred taxes and other taxes I am now responsible for. I am facing foreclosure.  We both personally guarenteed the loan. At settlement I was to take over immediatly and he was not to reenter but he continued, unknown to me, to sign docs as president and didnt resign for another month. I don't know what to do. Can he be held responsible for the mortgage and half bills I've been paying since he legally for 4 years has owned 1/2 the corp according to him?

Answer
Jayne, have you talked to the lawyer who handled your divorce?  This is really a question for the divorce court, not a corporate law question.

That being said, you have a real mess on your hands.  First of all, you say that tax returns were filed "in error" showing him as the 100% owner.  Since you say that the business is an S corp, if the K-1s were issued in his name, who actually picked up the income (or loss)? If you weren't being shown as the owner on the K-1, how did that error continue for 4 years?

Under corporate law, a shareholder is not normally responsible for the debts of the business.  If one shareholder funds the business and there is no agreement that the other owner will contribute, then the contributing shareholder has no grounds to force the other shareholder to pick up a share of the losses.  That defeats the limited liability protection of the corporate form.

If your ex-husband took funds from the corporation without authorization, that is a different story.  In that case, you are not making him liable for the company's debts but simply making him repay what he took.

I expect that, absent a showing that your ex took money that he was not entitle to, simply having his name on some stock certificates is not going to give you the ability to make him cover a share of the losses the business has suffered.  A more likely result is that the divorce court would order him to transfer the shares that should have been transferred as part of your settlement.  If the company is under water, getting his shares now is not going to be a meaningful benefit, but it puts you back where you would have been.

It is very important that you have this discussion with the attorney who handled your divorce.

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David K. Staub

Expertise

I am a business and tax attorney and have spent more than 30 years assisting people in buying, selling, merging and spinning off businesses. I can answer questions on the mergers and acquisitions process and the related legal issues, in general. Topics can include structuring the transaction, negotiating the deal, conducting due diligence, and more. I can also guide people to find sources for answers to specific legal questions which cannot be answered in a forum of this nature.

Experience

I have been an Illinois business attorney for almost 30 years. I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.

Website
Staub Anderson LLC
Chicago, Illinois
Mergers & Acquisitions

Illinois business attorneys

Practice Areas
Business Organizations
-Corporations

-LLCs
-Partnerships

-Joint ventures
Mergers & Acquisitions
-Buying/selling business
Securities Law
Tax Law
Technology Law
-Software licenses
-Development agreements

Trademarks

Disclaimer
Responses are intended to be informational only. No response is intended to constitute legal advice or create an attorney-client relationship. Online advice is not a substitute for consultation with an attorney.

Organizations
Illinois State Bar Association; Chicago Bar Association (former Chairman of the Corporation & Business Law Committee and former Chairman of the Mergers and Acquisitions Subcommittee; former Executive Committee member, Federal Tax Committee and Chairman of subcommittee on general tax issues); Glenkirk Foundation (Trustee; Vice-Chairman/Strategic Planning); Association for Corporate Growth, Chicago Chapter; Midwest Entrepreneur Forum; Midwest Association of Alpha Delta Phi - President

Publications
Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter; Internet Law Forums

Education/Credentials
Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974

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