Have you ever wondered what happens to an owner who has less the 51% and is kicked out of the business? You were right it can be your worst nightmare.
There has been a recent court case on this matter.
A locked-out partner still has to report his share of partnership income, according to the Tax Court. Two men set up a partnership to operate a restaurant. One took a 40% stake in the entity and was in charge of day-to-day operations such as cooking and serving, while his partner owned 60% and handled the finances.
A few years later, the two had a falling-out and the 60% owner shut the 40% partner out of the business. He changed the locks, refused to talk and ignored several requests for records. The 40% owner got a K-1 from the business reporting 40% of the profits, but he didn’t put it on his 1040 because he never got any money. Despite the lockout, he’s still a partner and owes tax on his share.
Martignon, TC Summ. Op. 2012-18
The same K-1’s could be received for an LLC or an S-Corp. The results would be the same.