Close Business

Not ready to close your business? Proven steps for turning failing business around.

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.

Straight talk about business bankruptcy and closure