Is there a difference in liability protection between an S-Corp and a C-Corp?
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Is there a difference in liability protection between an S-Corp and a C-Corp?
I have been told that a C-Corp offers better liability protection than an S-Corp. However I am unable to find anything to corroborate this information.
Asked on March 20, 2012 under Business Law, Florida
Answers:
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 12 years ago | Contributor
Legally, both the S-Corp and the C-Corp provide the same protection against liability--the only significant difference between them is their tax treatment.
The source of what you heard may be this: there is a rarely used, and even more rarely successful, doctrine called "piercing the corporate veil." It allows creditors, including judgment creditors, to hold the shareholders of a corporation liable if it can be shown the corporation was essentially a pretext, used only to try and defraud creditors, vendors, customers, clients, etc. If the owners' personal finances and the corporate finances were so co-mingled that the corporation did not in fact have an independent existence, that is when the corporate veil might be pierced. While the same legal standard applies in this regard to both S- and C-corps, as a practical matter, the owner of an S-corp., due to the different tax treatment (and the psychology that evokes), is much more likely to wrongfully use corporate funds or accounts as his/her own; therefore, as a practical matter, it is somewhat more likely that the corporate veil of an S-corp would be pierced than that of a C-corp.
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