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?

UPDATED: Jun 18, 2014

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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


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 8 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.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although AttorneyPages.com has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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