Legal Question in Business Law in California

Re: son suing parents over profits of retail store

The answer is that the facts, evidence and testimony will all be weighed by the tryer of fact. What difference will an anonymous attorney opinion make for you? How would you plan on using whatever information you were given? If you do not already know the answer to that question, and know how to effectively conduct protracted discovery, pleadings, motions, witness examination, litigation and trial, then you should be represented by counsel in such lawsuit. It seems unwise to avoid paying for legal help, at the risk of your company, income and profits. If you decide to get professional help, feel free to contact me.

Re: son suing parents over profits of retail store

This sounds like a dispute as to whether the son is a co-owner or just an ex-employee.

A verbal agreement that by its terms is not to be performed within a year from the making thereof may be unenforceable under the Statute of Frauds, Civil Code section 1624(a)(1). There are many exceptions and loopholes to the Statute of Frauds, but it may be a strong defense to enforcement of the verbal (lawyers would say oral) agreement.

Note that if the business tax returns show in any way that the son was an owner, and not just an employee, this may overcome the Statute of Frauds defense. Then the oral contract can perhaps be enforced, and the question in court will become what the terms of the contract were or are. If it can be shown that the son was supposed to stay for five years in order for his ownership to vest, the parent might win. However, a tax return signed by the parent and reflecting a part interest by the son will be entitled to a lot of weight because it is a written document and filed to comply with a law.

A K-1 is just an IRS schedule used by a partnership, LLC or "S" corporation to report the partner, member or shareholder's proportionate share of income and expenses, etc. There are at least two different kinds of K-1 schedules, each to be used for a different type of organization's tax return. So, it's not really clear what you mean when you say "son paid by k1." I suppose what you did was pay him distributions of profits instead of wages, on which payroll taxes would be due, and he would probably have been subject to a workers comp insurance requirement.

Your accountant may be partly at fault for assisting you in a tax avoidance scheme; you can't have it both ways, your son is either an owner or an employee, and if your agreement was that he were to become an owner only after five years, he should have been treated as an employee to that point.

Re: son suing parents over profits of retail store

I forgot to comment on the employee testimony part. I think if tax returns showing the son being treated as a co-owner are introduced in evidence, employee testimony that he was supposed to be an employee and not an owner won't impress the judge, particularly when he wasn't paid wages, withheld from, nor given a W-2.

The fact that stocks were never issued isn't particularly meaningful. Corporations have owners whether stock certificates have been given to them or not. Sounds like this is an "S" corporation with three shareholders. What is shown on the IRS Form 2553 S-corp. election form in columns j, k and l, where you presumably reported who your owners were and the percentage ownership each held? (These percentages should correspond with the allocations on your K-1 schedules.)