S-Corporation Bankruptcy and Personal Liability

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When you file bankruptcy as S-Corporation, your bankruptcy liability varies from other bankruptcy liabilities. If you are the owner or shareholder of an S-corporation, and an S-corporation bankruptcy is filed, as a shareholder of the corporation, you have personal liability towards all the liabilities of your corporation. Thus, you would have to understand certain important considerations while filing S-corporation bankruptcy.

What is S-corporation?

An S-corporation is a small business which has single proprietorship or small partnership firms. The number of shareholders of the S-corporation cannot exceed 75 in numbers and the shareholders can be an individual, trust or an estate but not an alien.

Time of Filing

You could opt to file your S-corporation bankruptcy under Chapter 11 or 7 depending on the position of your corporation’s business. If there are hopes to run the business continuously and progress further, you could file under Chapter 11 (business reorganization). Else, you may have to file under Chapter 7 (liquidation) where your corporation’s assets might be liquidated and corporation itself may be dissolved. Even though it is a corporation bankruptcy, eligibility test is conducted for the bankruptcy filing just like other bankruptcy filings.

S-corporation Bankruptcy Estate

Just like ordinary Chapter 7 bankruptcy cases, S-corporation bankruptcies will also have to liquidate the non-exempt assets and the proceedings from the liquidation has to be used to meet the creditors payments. Only difference from other corporations is that in S-corporation bankruptcies the proceeds of the sales of the assets does not get taxed by the Internal Revenue Service’s (IRS) unlike other corporations.

Personal Liability

As a shareholder of an S-corporation, your personal liability towards creditor is not valid if you have not signed a personal guarantee. The profits and losses in the S-corporation bankruptcies are directly passed on to the shareholders of the S-corporation.

In S-corporation bankruptcies, the situation of double taxation is avoided. It means that only shareholders get taxed and not the corporation, thus avoiding tax payment two times for the same influx of money. However, there is a limit on the amount of pass-through profits which would not get taxed by the IRS. When the pass through incomes crosses this limit, both the corporation and the shareholders have to pay the tax.

Getting Legal Help

When you are planning to file S-corporation bankruptcy, hire the services of a competent corporation bankruptcy attorney. Take necessary legal advice and act accordingly to avoid complications in the processing of your bankruptcy filings.