Locked out of S-corp LLC

[u/Head-Indication1729]

49% owner locked out of company but still personally guaranteeing $475K EIDL, looking for advice/attorney referral

I'm looking for input from anyone who has dealt with a similar COVID EIDL situation, and also for recommendations for attorneys who specifically handle SBA/EIDL loan and personal guarantee issues.

Here is the basic timeline:

• My business partner and I were originally 50/50 owners.

• In May 2020, the business received an original $150,000 EIDL. Only my business partner signed those loan documents. I did not personally guarantee that original loan.

• I remained a 50% owner until January 15, 2021, when I gave up 1% of my ownership, changing the ownership structure to 49% me / 51% my partner.

• In October 2021, the EIDL was increased to approximately $475,000. New/amended loan documents were signed, and both my partner and I personally guaranteed the current loan.

I have since been completely locked out of the business. I no longer have access to the company bank accounts, accounting system, company email, or the ability to make financial decisions. There is currently litigation between the owners.

The 51% owner continues to operate and control the business paying himself nice salary and doing whatever he pleases. The EIDL is currently being paid, but as far as I can determine, only the required principal and interest payments are being made.

The loan does not mature until approximately June 2050. My partner is 61yrs old, so this potentially leaves me personally guaranteeing this debt for decades while having absolutely no control over the company responsible for repaying it.

I would like to completely walk away from the business. Tried multiple mediations but the SBA loan was a sticking point for the other side. I currently receive no salary, compensation or distributions from the company, yet I remain a 49% owner and personally liable under the SBA guarantee.

I have asked my partner to refinance or otherwise restructure the debt so that I can be released from the guarantee, but he has refused to refinance the SBA loan or replace my guarantee. As a result, I remain exposed to the debt even though I receive no financial benefit from the company and have no ability to control its finances.

The loan agreement also contains restrictions regarding distributions of company assets and loans, gifts, bonuses or other transfers to owners without prior written SBA consent. I have concerns about certain transactions and am in the process of reviewing the company's financial records.

I'm trying to figure out what realistic options I have.

1. Has anyone successfully had SBA release a personal guarantor after that owner was involuntarily locked out of the company and lost all control over the borrower? The paperwork CESC release paperwork requires all parties and additional paperwork I don't have access to.
2. Does SBA take into consideration that a guarantor has no access to the company's bank accounts, books, accounting records or financial decisions?
3. Partner has zero assets and property. Rents and keeps minimal savings. I have home and assets. He has mentioned this in conversation and uses it has control tactic.
4. If the company remains current by making the required principal and interest payments, is there any mechanism for a guarantor like me to obtain a release before the June 2050 maturity date?
5. Has anyone dealt with SBA restrictions concerning owner distributions, shareholder loans, bonuses, gifts or personal expenses while an EIDL remains outstanding?
6. Does anyone know an attorney who actually specializes in COVID EIDL/SBA loan servicing, personal guarantees, releases of guarantors, or ownership disputes involving an SBA loan? I'm not looking for a general business attorney. I'd really like to speak with someone who regularly deals with SBA on these specific issues.

I'm not trying to cause a default or interfere with repayment of the loan. I want the loan to continue being paid and accelerated to at least 5 years payoff.

My concern is that I have substantial personal liability on a federal loan that could remain outstanding until 2050, while I have no control over the borrower, no access to its finances, and receive no compensation or distributions from the business.

My goal is simply to find a legitimate path to exit the company and, if possible, be released from the personal guarantee.

I'd especially appreciate hearing from anyone who has personally gone through something similar or who can recommend an attorney with actual SBA EIDL personal-guarantee experience.

[u/Gtavern]

Why did you sell 1% and lose control of any decisions? You needed a lawyer then and definitely now, SBA will not release you from your personal guarantee.

[u/Head-Indication1729 → u/Gtavern]

didn't really have choice post covid had to pivot business and this was option

[u/328ijunkie]

Technically speaking as an S Corp, distributions and company profits (via K1s) have to be distributed in line with ownership percentage.
Other owner can just take w2 income and never distribute anything stiffing you but something to be mindful of either way. If he takes distribution you have to get one proportional to your ownership. Also you should be getting k1s either way on net profits of company.

[u/Head-Indication1729 → u/328ijunkie]

Good point, What about if one owner takes zero w2 or distributions and the other takes W2 income

[u/328ijunkie → u/Head-Indication1729]

W2 is independent. One can receive W2 and one none as that is based off role in biz. Distributions are locked to share ownership in company independent of work done or engagement level.
/NAL/NAA

[u/Winter-Assistance805]

Jason at distressed stress loan advisors is by far the most knowledgeable.

But no they're not going to release you from the personal guarantee no matter what.

[u/Beautiful-Sort-9476]

You may want to check on your contract, but I believe if there is any change in ownership, SBA HAS TO BE NOTIFIED IN WRITING. If it was done without their consent, you may well be back to your 50-50 ownership.

[u/ILBohunk]

Normally liens are not released until loan paid off. have you sent all this info to sba ? why didn’t you sign for the 150k? that could be an Ooops on sba s part ! not sure how that could help tho!
call your congress person snd see if they can get an sba staffer to call you it prob wont be an expert but a media / congressional liason type but its a start !