Charlotte, NC asked in Business Formation, Business Law and Tax Law for Delaware

Q: I left a company I cofounded but still have 50% share. Would I be personally liable if the company does not file taxes?

I cofounded a S corporation in Delaware a few months ago and left the company as the board member and employee after a couple of months due to disputes with my partner. I still kept the shares (50%) because I was not compensated for the work I did. The company was a start-up and did not have any income. Because I requested employer identification number from the IRS, I'm afraid that the IRS may ask me about the company if the company does not file for taxes and the annual report. So, my question is whether I will be liable for filing the annual report or any taxes even though I am not a board member or an employee?

1 Lawyer Answer
D. Mathew Blackburn
D. Mathew Blackburn
Answered
  • Tax Law Lawyer
  • Englewood, CO

A: Depends on what's in the operating agreement/by-laws. What was the underlying entity that was S-elected? S-corps cannot be created at the state level, you have to have a registered entity upon which to elect S status. The IRS will use the entity law to determine owner liability and responsibility for filings . When you filed for the EIN you listed yourself as the responsible party so if that status has not changed it's you for now. You may be able to shift that burden in the future.

For DE the annual fee is not your responsibility personally but if the state dissolves the entity for failure to file the report and pay the fee your S-election could be terminated and create a taxable event.

I'd get this resolved. It's not going to get better on its own\. Either get out or make sure your partner is following the rules.

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