Legal Question in Business Law in Maryland

Corporate Structure and Ownership

As a principal employee (Executive VP) in a small defense company I am negotiating ownership. It will be in the 20-40% range. The company is a MD S-Corp with husband wife ownership. The company lawyer has suggested an executive agreement giving me a right to the % of profit each year and % of any liquidity event. He cites the complication of making me a stock owner in an S-Corp especially if the majority chooses to retain profit in company each year. They claim that the agreement would give me the same rights as an owner without the hassle of the annual paperwork, exposure of personal tax records annually etc.. The company could become a C-Corp but he says that could take a year of planning to do right. Is there a risk in not being a stock owner? They claim the tax simplification on my part should be attractive to me. It seems to simple ...does anyone have any thoughts on what is being proposed? Thanks in advance...


Asked on 12/27/07, 10:17 pm

1 Answer from Attorneys
Robert Sher Wagshal and Sher

Re: Corporate Structure and Ownership

I really don't understand what the "complication" the lawyer cites is. In an S Corp, the corporation's profits are passed on to the shareholders regardless of whether the profits are actually distributed in the form of dividends. Right now that affects the current shareholders, whether or not you become one. The risk in not being a shareholder is just that--you have no ownership interest, and therefore fewer rights than if you were one. Granted, if you acquire stock along the lines you suggest, you will still have a minority interest, and could have your interests and proposals overridden by the majority, but your stock could never be taken from you, so as long as it has value, you have an asset. If you do decide to go along with their proposal, make sure you have the executive agreement carefully reviewed by an attorney.

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Answered on 12/28/07, 9:27 am


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