Does an S Corporation Protect My Personal Assets?
Starting your own S corporation can complicate the day-to-day operations of a business. Even with a sub-chapter S corporation, designed to simplify the process of having a corporate business structure, you will have to do certain things to comply with legal corporate requirements, including filing formal financial statements, electing officers and having an annual business meeting. Taking these steps can protect your personal assets from business liabilities.
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A Separate Entity
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You can form a sub-chapter S corporation by filing the correct paperwork with your state. This filing, when accepted by officials, creates a completely separate entity for conducting business, at which point it can own property or enter into legal agreements on its own. The owner of the business becomes the president or CEO, and is able to sign agreements as an officer of the corporation and not be personally liable for any of the corporation's agreements, meaning assets held in the owner's name will not be at risk for debts that the corporation guarantees.
Keep Assets Separate
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For the S corporation to be considered a separate entity, you must keep corporate and personal assets separately. One instance of co-mingling these assets is when a shareholder, or owner, pays personal bills from their corporate bank account. It is possible that a simple act like paying a small personal expense from a business account can cause a judge to determine that your corporation is just a shell, and not truly a separate entity. This can expose you personally to liability for business debt or a business lawsuit. Also, personal vehicles should not be held in the corporation's name.
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Adequate Insurance
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To protect your personal assets against a business lawsuit, it is important to carry adequate liability insurance on the corporation. Liability insurance is inexpensive compared to the level of coverage that you can purchase, so it doesn't make sense to skimp on this coverage. In addition, major corporate owners should consider having an umbrella policy for themselves. In case of an accident or lawsuit against a corporation, a lawsuit may also be brought against the corporate officers personally. A lawyer may be able to make a successful case for holding the officers personally liable for the actions of the corporation, particularly if all of the legal requirements for a corporation are not met.
Other Options
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In addition to an S corporation, you have another option for protecting your personal assets using a limited liability company, or LLC. An LLC provides limited liability for personal assets against either lawsuit or collections for business debt. In addition, an LLC is simpler to form and maintain. A single owner LLC does not need to file a separate income tax return, as all profits or losses pass directly to the owner or partners. A disadvantage of an LLC is that it does not have some of the tax benefits that an S corporation enjoys.
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