Updated business recovery plan
and procedure for troubled companies
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.
If
your business is currently in trouble, here are 3
concerns unique to your situation
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