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Wed 27 Jun, 2007 09:33 am
If you had an S corporation and declare bankruptcy, are you personally liable or would this affect your personal credit ratings? For example if you had some assets - a home, mutual funds, savings - could any creditors come after your personal income?
If you were married, could you put all these assets in your spouses name only (if the business was only in one spouse's name) to protect these assets?
Also, if both husband and wife signed a guaranty for lease/rent space and the corporation goes bankrupt, what are they required to pay towards the lease?
Remind me not to invest in your company!
Just gussing, but the main purpose of a corporation is to shield the individual owners/shareholders from the liabilities of the business.
I believe that GENERALLY, the creditors can only go after the corporate assets. There are some exceptions to that and if you've co-mingled your business and personal assets it can get ugly.
If you've kept everything totally and clearly seperate then your personal assests SHOULD be safe.
My husband briefly spoke to his lawyer regarding this - his lawyer suggested putting our house and stuff in my name just in case. However, the lawyer also suggested trying to sell the business which we are.
My husband simply does not want to put any more of our personal money into the business - the working cash has depleted by $7,500 leaving only $2,500 in cash. He has not taken any salary for himself since starting
Depending on how much outstanding credit the business owes when it declares bankruptcy, the creditors may try to attach your personal funds. The reason for incorporating to begin with was to create a wall of safety between your business and personal assets. You'll want to make sure your Corporate Book is completely up to date (annual shareholder's meetings, proper notices filed in the Book, etc., even if there are only two shareholders) and be prepared to show that there was no co-mingling of funds. Did you issue new shares when you put more money into the business? Were additional funds taken as private loans to be paid back to your personal accounts with interest? It really depends on how 'business-like' you ran the business and how completely the books have been kept.
JPB wrote:Depending on how much outstanding credit the business owes when it declares bankruptcy, the creditors may try to attach your personal funds. The reason for incorporating to begin with was to create a wall of safety between your business and personal assets. You'll want to make sure your Corporate Book is completely up to date (annual shareholder's meetings, proper notices filed in the Book, etc., even if there are only two shareholders) and be prepared to show that there was no co-mingling of funds. Did you issue new shares when you put more money into the business? Were additional funds taken as private loans to be paid back to your personal accounts with interest? It really depends on how 'business-like' you ran the business and how completely the books have been kept.
It's a very small small business - only my husband owns it - with me named as Treasurer. He is going to see if he can fire me. There are no shares - only our personal money that was invested. Nothing was set up to be "paid back" to us in any form.
Linkat wrote:JPB wrote:Depending on how much outstanding credit the business owes when it declares bankruptcy, the creditors may try to attach your personal funds. The reason for incorporating to begin with was to create a wall of safety between your business and personal assets. You'll want to make sure your Corporate Book is completely up to date (annual shareholder's meetings, proper notices filed in the Book, etc., even if there are only two shareholders) and be prepared to show that there was no co-mingling of funds. Did you issue new shares when you put more money into the business? Were additional funds taken as private loans to be paid back to your personal accounts with interest? It really depends on how 'business-like' you ran the business and how completely the books have been kept.
It's a very small small business - only my husband owns it - with me named as Treasurer. He is going to see if he can fire me. There are no shares - only our personal money that was invested. Nothing was set up to be "paid back" to us in any form.
I think what your lawyer is envisioning (based on your comments here) is that the creditors are going to say that he never really formed an S Corporation and that he ran the business as a Sole Proprietorship which, if the judge agrees, means he's fully liable for any of the business debts.
fishin wrote:Linkat wrote:JPB wrote:Depending on how much outstanding credit the business owes when it declares bankruptcy, the creditors may try to attach your personal funds. The reason for incorporating to begin with was to create a wall of safety between your business and personal assets. You'll want to make sure your Corporate Book is completely up to date (annual shareholder's meetings, proper notices filed in the Book, etc., even if there are only two shareholders) and be prepared to show that there was no co-mingling of funds. Did you issue new shares when you put more money into the business? Were additional funds taken as private loans to be paid back to your personal accounts with interest? It really depends on how 'business-like' you ran the business and how completely the books have been kept.
It's a very small small business - only my husband owns it - with me named as Treasurer. He is going to see if he can fire me. There are no shares - only our personal money that was invested. Nothing was set up to be "paid back" to us in any form.
I think what your lawyer is envisioning (based on your comments here) is that the creditors are going to say that he never really formed an S Corporation and that he ran the business as a Sole Proprietorship which, if the judge agrees, means he's fully liable for any of the business debts.
I'll have to check - I thought this was set up with our CPA.
A corporation must have at least two officers. A President (or Chairman) and a Secretary. Other offices are optional. Is he listed as both President and Secretary on the Articles of Incorporation?
Linkat wrote:
I'll have to check - I thought this was set up with our CPA.
The S Corp may be established on paper but he isn't running the business as an S Corp.
As an S Corp you must have at least 2 corp officers, you must hold an annual meeting, you must issue shares, you can't intermingle personal assets with business assets...
Your hubby apparently hasn't been following any of the laws regarding how an S Corp is supposed to operate. He's operating as if it is a sole proprietorship.
roger wrote:Just gussing, but the main purpose of a corporation is to shield the individual owners/shareholders from the liabilities of the business.
Doesn't always work that way. Not only can the IRS go after the individuals assets in certain cases with an S-Corp. but remember Enron? Criminal charges were against the individuals entrusted with running the Corporation. At least that is what I was told anyway so that could be incorrect.
With Enron there were criminal charges that pierced the corporate veil. This is a different matter -- the question of whether creditors can seize personal assets for this corporation. I'm with fishin; I think the idea of the S corp was there but not followed through on.
Is there a large amount of outstanding debt? Are creditors at the door? Do you think you could speak to them and make a deal about long term payments? I assume debt is the reason you can't just lock the door and walk away.
Is selling the business realistic? Few people want buy a new, unprofitable business. Will more debt pile up if you keep trying to run the business? Anything of value that can be liquidated? Is it a franchise? You can sometimes get additional legal help from the parent corporation. Sorry to have more questions than answers, but I don't know enough to assess what you might be able to do.
You might also be able to get free advice from your state's small business department. I've learned that often speaking to just one lawyer is not enough, like with doctors, get a second opinion- preferably from a specialist.
JPB wrote:A corporation must have at least two officers. A President (or Chairman) and a Secretary. Other offices are optional. Is he listed as both President and Secretary on the Articles of Incorporation?
I believe he is - I am only listed as Treasurer.
There is not a huge amount of debt - I would say about $100k or less in a loan. The rest would be anything evidentially owed - like a monthly lease. Currently we are not in arrears for any payments. We are simply running out of working capital and my hubby does not want to pump any more of our personal savings into the business.
He is not taking a salary so we have been slowly taking money out of savings to pay our personal monthly bills. We did save about 6 months of income we thought we would need in addition to my salary. It has been six months and we will be down to $800 from this savings to pay for personal stuff next month. We do have other money in mutual funds and money markets, but this was the money to hold us over until the business was supposed to support my husband getting some sort of salary.
In any case, he wants to sell. We recently put the business up for sale, but I am concerned about the working capital situation. He said if he runs out of money, he rather close his doors than put more money into it. I am concerned about our personal credit rating and potential to attach our personal funds, like our home to anything that is owed.
This is a franchise and many of them are very profitable. I think it may be the season for his location - summer - that is making business slower. A nearby college had been a big source of his income a few months ago. There are some days when he is busy due to some nearby businesses that hold various functions sports and concerts, but it is off and on during some weeks.
I am simply trying to see all aspects so we can be prepared. I do not think bankruptcy is the ideal answer, but I want to be prepared.
Linkat, under the rules of an S Corp, he needs to pay himself a 'reasonable salary'.
Quote:Reasonable Compensation
The number one audit risk for S-Corporations is salary and wages paid to officers of the corporation. S-Corporations are also subject to hobby-loss rules. Together these are the two most significant audit risks facing S-Corporations right now.
Reasonable Compensation
The fastest way to get audited as an S-Corporation is to file an 1120S with no amount showing on Form 1120S Line 7 "Compensation of Officers." It is assumed by the IRS that no one works for free, and so the IRS has said over and over again that officers of the corporation must receive wages (reported on line 7). As an owner-employee of the S-Corporation, you must pay yourself a salary, and pay payroll taxes on your salary, even if the business is losing money. You don't have to pay yourself a high salary, but it must be a "reasonable amount" according to the IRS.
...
What's a Reasonable Salary?
Compensation of shareholder-employees should be based on the same criteria as salary for non-shareholders. Factors would include prevailing market rates; the individual's knowledge, skills, and abilities; amount of hours worked; and so forth. Salary is reasonable if a non-shareholder would be willing to accept the job at the proposed salary level.
Generally, the IRS will grant the S-Corporation a degree of latitude in setting salary compensation for shareholder-employees. However, the salary must be paid, and the level of salary must be appropriate.
Why is Officer Compensation an Audit Priority?
The IRS can collect payroll taxes on officer compensation, and the penalty for failing to pay payroll taxes is 100% of the taxes owed. S-Corporations will avoid this payroll tax penalty by paying shareholder-employees a reasonable compensation.
Source
That's odd - he asked either the CPA or lawyer or both if he had to take a salary and he was told No. Not that I doubt you, but it sounds like he got incorrect information.
Maybe I had S corporation incorrect - but I am almost positive that is how he is registered. Not sure - is there some other corporatation that would protect your personal assets - just wondering as this is how he was advised to set up his company so he wouldn't have personal assets tied to business assets.
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