Business owners form an S Corporation by filing an IRS
form 2553. The advantage is that it allows the IRS to tax
the corporation like a partnership or proprietorship. The
corporation can pass its profits and losses directly to
the shareholders. There are certain limits on S Corporations
that are not the same as an LLC (Limited Liability Corporation).
This becomes obvious during an S Corporation bankruptcy.
In the unfortunate event that an S Corporation must file
Chapter 7 or Chapter 11 bankruptcy, the court will first
decide if the S Corporation still meets the requirements
for that status. Assuming it does, the S corporation bankruptcy
will continue.
A trustee appointed by the court may decide that selling
the company’s assets is the best way to resolve its
problems. In that case, the individual shareholders of
the S corporation are liable for any pass-through gains
with the understanding that they get no benefits from the
sale. Earnings from the sale pay off creditors.
The IRS cannot tax any money the S Corporation uses to
get rid of debt. However the sales earnings may change
certain tax exemptions like net operating losses.
Shareholder's Legal Responsibilities with an S Corporation
Bankruptcy
In short, owners filing an S corporation bankruptcy will
discover legal entanglements. These can include pass-through
income and liabilities the individual shareholder must
take responsibility for. The bankruptcy may involve a reorganization
plan, an insolvency contingent, a foreclosure or similar
legal actions. The court can force any of these actions.
Since the S corporation and its shareholders are not subject
to double taxation, there are certain tax effects that
apply to the shareholders. It takes much time and effort
to minimize the possibility of undue tax burdens created
by the S corporation bankruptcy. A subchapter S corporation
bankruptcy has the disadvantage of making shareholders
liable for any tax income generated after the bankruptcy
is filed. This is true whether the money passes through
to the shareholders or not because the corporation is not
a taxable body.
Many owners select an S corporation so they can pass-through
profits and losses directly to the shareholders. This avoids
the double taxation of an ordinary corporation where the
company pays tax and then the shareholders pay tax again
on their profits. The S corporation is limited in the amount
of passive income it can gain and the IRS tries to remove
pass-through profits paid in nontaxable fringe benefits.
S Corporation bankruptcy, however, does not remove the
shareholder from the picture.
Our
recommended business turnaround procedure. Step-by-step.
Prevent bankruptcy.
|
