Why are S Corporations less preferred over C Corporations for Asset Protection purposes?

Before the advent of the Limited Liability Company (“LLC”), the corporation was the only practical entity for the business owner from an Asset Protection point of view. The choice was then between the S Corporation and the C Corporation. Now the Limited Liability Company is the third and most prevalent option.

Most small business owners, in the past, elected the S Corporation over the C Corporation due to its tax benefits. Larger corporations normally have elected the C Corporation because of its number and diversity of stockholders. Specifically, the S Corporation is limited to one-hundred (100) unrelated shareholders. The C Corporation, of course, carries the burden of double taxation, which must be offset by deductible expenses (salary, bonuses, etc.). The compensation also has to be reasonable and not too high as to mimic a single level of taxation.

However, from an Asset Protection standpoint, the S Corporation may be the worst entity to own. If you own shares in a corporation in your personal name, and you are sued personally, a creditor can come after the shares in your corporation. It is far more difficult to protect S Corporation shares than C Corporation shares. C Corporation shares can be protectively titled to limited partnerships, irrevocable trusts or other entities. But these methods are unavailable to protect S Corporation shares. Thus, it is far more difficult to lawsuit-proof S Corporation shares because of its ownership restrictions. S Corporations can be owned by single-member domestic or international LLC, certain Trusts and individuals. An S Corporation also can not be owned by a foreign individual (an individual who does not reside in the United States). There are also certain intricacies with regard to S Corporations and community property states (such as California) that business owners should be aware of if they are married, and/or have been married at the same time as owning S Corporation shares in a business.

Contact The Presser Law Firm, P.A. to obtain a complimentary consultation on Asset Protection, Estate Planning and/or Business Law. Our attorneys are knowledgeable in Estate Planning, Asset Protection and Business Law. Call us today – (561) 953 1050 or e-mail us at: info@assetprotectionattorneys.com.