Legal Question in Business Law in California

Re: S-Corp president's fiduciary obligations

These are all good questions.

First, the liability for undeposited withholding taxes. Operators of small corporations should be aware that the IRS is authorized to, and will, go after individuals to collect undeposited money deducted from wages and salaries (but not the corporation's share of payroll taxes). This is called the "100% penalty" and can be collected personally from whichever corporate officers were responsible for making decisions on dusbursement of the corporation's money. This is determined in part by looking at a random sample of corporate checks to see whose signatures are on them.

Second, minority shareholders have rights, but they are somewhat limited. Absent a shareholder agreement of some kind, the majority holder can probably dictate a shut-down or sale, although I seem to remember a case holding that he could not, but I believe there were unusual circumstances. Even so, the minority holders do have rights, including the right to an appraisal and to fair and equal treatment in the wind-up of corporate operations and distribution of net remaining assets. You might want to look up and review Corporation Code sections 1300 to 1313 on the subject of "dissenters' rights." These laws apply to instances of merger or reorganization, but the principles probably apply to most other major corporate actions including a shut-down. See also sections 1900 to 2011 re voluntary dissolution.

Your claims for return of equity investment, a documented long-term loan, and short-term advances that may not be so well documented all must be addressed by the then-current directors and management in a sale, closure and/or liquidation of the corporation. Claims of outsider creditors would have top priority, followed by loans from insiders, then whatever assets are left can be distributed to shareholders, pari-passu. It's much like distributions following a bankruptcy, but somewhat less formally structured. Whether you get 100 cents on a dollar owed will depend upon how much cash is raised by selling or liquidating the corporation and how much is then owed creditors who are outsiders. If the company is behind on depositing wihholding taxes, I'd say you chances of getting anything back are not good, but maybe the company merely had a liquidity problem and has long-term assets such as patents, machinery and real estate that can be sold to pay its bills, leaving something for the insiders.

The president and remaining board member(s) are fiduciaries of the shareholders and are sometimes held to be fiduciaries of the outside creditors once the corporation becomes insolvent.

The application of this latter principle in California is uncertain.

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