"Does she know a shareholder of an S Corp is also supposed to be an employee if she works for the business?"  I told her. She doesn't want to pay herself wages for those years. She would rather risk an IRS audit in order to get out of this EDD wage classification audit.

"S Corps don't work that way. If you're a 50% shareholder, you get 50% of everything." Thank you. I was thinking of partnerships.

I think she needs to start a new company mainly to be clear of legal and tax liabilities.  The other guy can compensate her without selling or gifting stock to her of the old company.