A corporation is a form of doing business that normally provides its shareholders with a shield against creditors of the corporation, unless the shield could be “pierced” or the shareholders give personal guarantees. A regular, or “C”, corporation is subject to tax as if it is a separate person, and the shareholders receive only the earnings of the corporation reduced by the taxes paid by the corporation. Also, if the corporation runs a net loss, the shareholders are not able to claim the loss on their own tax returns.
An “S” Corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations that have already been formed. “S” Corporations “pass through” their profits and losses directly to the shareholders, who report the income or losses their personal returns.
A corporation is formed by filing Articles of Incorporation with an appropriate state official, such as the Secretary of State.
Services offered in connection with forming your corporation.
- Assistance in the determination of the type of Corporation desired: Closely Held Corporation, Sub-S Corporation, Professional Corporation, etc.
- Corporation name availability search.
- Corporation name reservation.
- Preparation and Filing of the Articles of Incorporation.
- Acquisition of a Taxpayer Identification Number. Preparation of a Corporate Record Book, which includes:
- The Corporate By-Laws
- Banking Resolution
- Stock Certificates
- Corporate Seal
- Minutes of the First (organizational) Meeting of the Board of Directors.
- Template for the (future) Minutes of the annual meeting of the Board of Directors.
- Forms and instructions for the filing of all annual fees.
- Assistance in any transfer of assets into the Corporation or the transfer of ownership of the Corporation to a Living Trust. AmeriEstate Legal Plan, Inc. is also available to secure or file any subsequent documents necessary, which may include Certificates of Good Standing, Applications for Authority or New Authority, Amendments to the Articles of Incorporation, Mergers or Annual Reports.
Creditors are usually characterized as Inside Creditors or Outside Creditors
Inside Creditors: These are creditors whose claim is directed against the business operation or real estate directly. Generally the creditor is limited to remedies against the assets within or inside the entity itself.
- Example: a person slips and falls or suffers from respiratory illness stemming from harmful mold related to water damage at an apartment house owned by an LLC. Such as person only has the right to assert the claim against the LLC itself. The manager and members of the LLC have no personal liability to the inside creditor.
- First line of defense: Most businesses and real estate operations have liability insurance to protect against inside creditors. However, there is always the danger that the claim is outside of the scope of the insurance policy or that it may exceed the policy limits.
Outside Creditors: These are creditors whose claims arise outside of the purview of the business entity or real estate operation and are generally asserted against the business or real estate owner personally.
Often these are claims against individuals such as auto accident claims in excess of policy limits, other tort liability beyond the scope of personal or liability umbrella insurance. Such claims may also stem from contract claims for personal loans, guarantees and other contractual obligations.
This term is a metaphor for the liability protection offered by an incorporated business entity, such as a Corporation or Limited Liability Company (LLC).
“Piercing” the corporate veil is an equitable remedy created by the courts and now in some states codified in state statutes, which allows creditors of a liability limiting entity (Corp or LLC) to satisfy their claims against not only the entity’s assets, but also the personal assets of the owner(s) of the entity.
Factors for Piercing:
Commingling of funds
Failure to observe procedures and formalities
Where the member has all or substantially all control over the LLC. Not enough of an issue to allow piercing by itself especially if proscribed procedures and formalities are followed.
Was there enough cash or other assets available to meet the company’s obligations? Did the company consistently operate at a loss (before depreciation or other non cash expenses)? Did the owner contribute personal funds repeatedly without properly documenting them for example as loans with a stated interest rate?
Typical fact pattern is where a debtor makes transfers (either by gift or “excessive” payment to a particular person or favored creditor) of some or all of his/her/its assets, usually to a party related to or controlled by the debtor, leaving themselves with insufficient assets from which to pay the attacking creditor.
If a judgment is obtained against a corporation, then the typical worst-case scenario is that only the assets of the corporation may be used to satisfy the judgment.
Often times if a creditor is successful in obtaining a judgment against a corporation then a payment settlement can often be reached as it may result in a better arrangement for both parties. For the creditor can still collect something equal to or greater than what liquidation of the corporations assets would yield.