Do S Corporations Have Limited Liability?
Limited liability refers to the level of financial responsibility a person is exposed to. In a business setting, if a company has limited liability, the owners or operators of that business are generally only liable for the debts and obligations of the business up to the extent of their investments in the company. An S corporation offers limited liability.
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Forming an S Corporation
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An S corporation is a specific type of corporation that offers certain tax advantages over C corporations. To form an S corporation, the owners must comply with state and federal requirements. The Internal Revenue Service requires S corporations to have no more than 100 shareholders, and the shareholders generally must be individuals. The company may only have one class of stock.
Limited Liability
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Since an S corporation is a corporation, it has limited liability. Corporations are owned by shareholders. Shareholders invest money into the business and receive stock in return. The stock entitles certain benefits, one of which is the right to receive distributions of profit made by the business. The more stock a person owns, the greater the distributions that person is entitled to. If the business goes bankrupt, the shareholders are at risk only to the extent of their investments into the corporation. The S Corporation's creditors cannot go after the shareholders' personal assets.
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S Corporation Vs. C Corporation
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Tax treatment is the main difference between an S corporation and a C corporation. C corporations must pay taxes on profits made by the business. The distribution of those profits that are paid to the shareholders of the C corporation must be reported on the shareholder's individual tax returns. The effect is a type of double-tax. S corporations avoid the double-tax. Corporate profits "pass through" the entity untaxed. The shareholders of the S corporation report the distributions made by the corporation on their individual tax returns.
S Corporation Vs. LLC
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S corporations and limited liability companies both enjoy limited liability and pass-through taxation. However, S corporations are still corporate structures and therefore must abide by certain corporate formalities that do not apply to an LLC. S corporations must have annual meetings and keep accurate records. Further, the profits and losses are based on the shares held by the shareholder. In an LLC, the profits and losses can be divided in any way that the members agree to; it is not just based on the ownership interest in the business.
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