How are the parties involved in the S.corp Liable if sued?

Asked over 2 years ago - Walnut Creek, CA

Hello, I am looking to start a Real Estate Investment Co. and was looking to set up an S.corp. There are 5 parties involved in the business. One financier who is getting a mortgage loan, another who is investing cash, a realtor and a secretary/owner, etc (which is me).
We each have a certain percentage we all share from the net profit after the sale. Are we all responsible equally if we get sued by the investors??

Attorney answers (3)

  1. Kenneth Allyn Sprang

    Contributor Level 15

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    Answered . The idea of an S corporation, a C corporation, or an LLC is to limit the liability of the company to the assets of the company. If you are going to hold specific real property assets, you may wish to consider a separate LLC for each, with the corporation being the LLC member. In that instance, the liability for each building is limited to that building and its LLC.

    So long as all of your investors are American citizens or resident aliens and none of your owners are corporations or other business entities you should be able to take advantage of the S corporation.

    If you are going to operate in California, then given the cost of registration there you might as well organize in California. If you are operating in another state you may wish to consider organizing in another state, e.g., Delaware.

  2. Shawn Regis Jackson

    Contributor Level 15

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    Answered . I would have some concerns about setting up this business as a corporation. The decision between a corporation and an LLC with this type of enterprise will be critical...and should involve careful discussions with an attorney of your choice and a CPA. Typically, but not always, these types of projects will be an LLC for a variety of reasons...so, a discussion with an attorney, a CPA and a real estate investment specialist will be important...questions?

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  3. Michael Charles Doland

    Contributor Level 20

    2

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    Answered . From suits form outsiders, the corporate entity should protect the shareholders. From shareholders suing each other, there is no such protection. One way to minimize risk is to have a corporate attorney who represents the entity not the individual owners. I have seen that most self-formed corporations have no idea how to issue shares (or membership interests in LLCs) and this can provide unforeseen liability in the future. A corporate attorney would probablly also advise a buy-sell agreement and/or a managrement agreement to try to resolve disputes before they arise. One example would be to decide what "net profit" means in advance. Our office acts in this capacity for numerous corporations, and you may contact me via the Avvo profiles.

    The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may... more

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