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
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.
to turnaround your business without bankruptcy.