What Happens When There Is a Civil Judgment Against an S Corp in New York State?
One of the reasons for establishing an S corporation is to protect the personal assets of its shareholders from such things as civil lawsuits. In New York, as in other states, any creditor may file a civil lawsuit against an S corporation. Because a corporation receives treatment as a separate entity apart from its owners, an S corporation representative, preferably an attorney, must answer and defend the S corporation in civil court.
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S Corporation
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A company that elects to file as an S corporation does so under Subchapter S of the Internal Revenue Code. Unlike a C corporation, an S corporation may have only up to 100 shareholders and only one class of stock. In addition, an S corporation does not pay corporate tax. Instead, the company passes along its profits or losses to a shareholder who records his share of the S corporation's profit or loss on his personal taxes.
Civil Judgment
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In New York, civil lawsuits generally involve claims of up to $25,000. A creditor must go through the normal procedure as though the corporation were an individual and formally serve either by mail or hand delivery a summons to the corporation's representatives, usually a corporate officer or the S corporation's attorney. For all intents and purposes, the S corporation must answer the summons to appear in court.
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Exception
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Even though the S corporation shareholders' assets receive separate consideration in a civil judgment against the company, a creditor may "pierce the corporate veil" of protection in some instances. For example, if a creditor can prove fraud on the part of the company, this is enough to make shareholders personally liable for the debt of the company. Other actions that may put a shareholder's personal assets in jeopardy are the officers' commingling company funds with personal funds or failing to follow corporate formalities such as file annual reports.
Insight
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If your S corporation faces civil action in New York, contact an attorney immediately. Ideally, have a corporate attorney on hand who represents the company for such administrative duties as maintaining bylaws, corporate minutes and annual filings. Answer a summons to appear in court to represent the S corporation. Failing to do so, makes the S corporation guilty and gives a creditor a default judgment, which it can use to obtain a lien against assets of the corporation.
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