If we have a business that is set up as an ‘S’ Corporation with 2 officers who own 50% each of the company, would declaring bankruptcy effect our personal positions?

The economy has really hurt us and we are struggling to cover bills and pay ourselves a wage. What will happen to our credit scores? Would bankruptcy prevent us from starting another business or work for someone else with out financial restraints? We were told our personal effects would have to be sold to cover repayments to the companies debtors.

Asked on June 18, 2014 under Bankruptcy Law, Florida

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

A corporation, even an S-corp., is a separate and distinct legal person from the shareholders. The shareholders are not responsible for the corporation's debts, with the following limited exceptions:

1) the shareholders personally guaranteed the debts--they would be liable on the guarantee;

2) the shareholders are liable for any credit cards issued to them personally, even if the business name is also on the card;

3) certain tax debts (withholding and sales taxes) are the resposibilities of managers and/or responsible shareholders;

4) the debt arises out of a tort (wrongful act) done personally by a shareholder--e.g. if in driving the company car to a sales meeting, you hit someone, you can be liable as the at fault driver, and not because you are a shareholder; or

5) If the creditors can "pierce the corporate veil", or show that there was essetially no meaningful distinction between shareholders and corporation (e.g. comingled funds)--this is rarely done successfully, but is a possibility.

Apart from the above, the company's debts are not the shareholder's debts, and similarly, the company's bankruptcy will not affect the shareholders personally.


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