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S Corporation Bankruptcy


Advice, Tips & Traps

Corporate Reorganization and Today’s Marketplace

A corporate reorganization of debt occurs for obvious reasons, to help get out from under the burdens of certain debt. The courts will evaluate a business during the Chapter 11 proceedings to see what their plan for turning around the ailing business will be. They have the power and authority to send a business to chapter 11 bankruptcy court, or to turn the reigns of a business over to creditors. An ailing business has to prove they have assets to cover debt, otherwise officers and owners could find their business in the hands of their creditors. The creditors cannot send to collection any outstanding debt while a business undergoes chapter 11 bankruptcies. The corporate reorganization protects the business from any further damage and hope to improve the chances of market and profit recovery.

Many businesses throughout the years have gone through corporate reorganization and come out on top in the market later. Bankruptcy does not have to stifle business, but should help decrease debts and turn a business towards success. Corporate reorganization of debt provides a way for a business to calculate missteps and take a different approach to the business, with the eventual hope of making money and pulling itself out of the depths of financial ruin. If a business does not know the mechanics of the chapter 11 process, then corporate reorganization can be a painful trial. With the proper information and support, the corporate reorganization can trigger a change in the financial landscape of business.


How Shareholders Suffer with an S Corporation Bankruptcy

If you're considering bankruptcy for your S corporation,
here's some plain talk about what to expect.



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.

How to turnaround your business without bankruptcy.


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