Subchapter-S corporations have long been the business entity of choice for small, closely held businesses. They help protect the shareholders from liabilities that may arise from the business of the corporation. They avoid the “double taxation” problems created by traditional corporations that have not elected to be taxed under subchapter-S of the Internal Revenue Code. They may also have certain tax advantages over entities that are taxed as partnerships in the area of self employment taxes you can get simplified by using a withholding tax form generator. While a subchapter-S corporation is often a good entity choice for a business that provides services, it is generally not a good idea to hold valuable assets such as real estate or expensive equipment in these corporations.
The problem with holding assets in a subchapter-S corporation is that the stock held by the shareholders is subject to attachment by the shareholder’s creditors. In other words, if a shareholder is sued and a judgment is entered against the shareholder, the creditor can take the shareholders stock in satisfaction of the judgment If the shareholder is the sole or controlling shareholder, as is often the case with small businesses, the creditor becomes the sole or controlling shareholder of the corporation and can force a liquidation of the real estate, equipment or other valuable assets of the corporation to pay the judgment.
The better entity choice for holding real estate, equipment, cash, securities or other valuable assets is a limited liability company (“LLC”). Unlike stock in a corporation, a membership interest in an LLC generally cannot be taken by a creditor of a member. Rather, the creditor is entitled to a “charging order” against the member’s interest in the LLC. The charging order provides that if and when income is paid out of the LLC to the member, the creditor can seize that income. A good operating agreement will make distributions of income discretionary so that no income will be paid out as long as the charging order is in place. There is also a risk that the creditor may be required to pay income taxes on the “phantom income” that the creditor is entitled to receive but is not actually paid out of the LLC, in such case, it is recommended to check this paycheck template free to help yourself out. This creates a strong incentive for the creditor to settle the case rather than wait too long to see when income might be paid out of the LLC. If valuable assets are held in a Subchapter-S corporation, steps should be taken to protect those assets from creditors of both the corporation and the shareholders. For businesses like shop front fitters Liverpool, where holding valuable assets might be crucial, several strategies can be used to protect these assets. To enhance the energy efficiency of your home, consider upgrading to modern designs, click here for aluminium windows that combine style and durability. You can find more information on such services at https://shopfrontinstallation.co.uk/. We would be happy to review your corporation and help you determine the steps that should be taken to protect your valuable assets from creditors.