Skip to main content

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

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??

+ Read More

Attorney answers 3

Posted

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.

Asker

Posted

Thank you for your response. I do have a few more questions. We are going to be doing business in CA. Our business will be basically flipping residential properties. Does an S Corp work for this kind of business? I searched the SBA and it looks like it would. However, are there any other things I should be concerned about in this set-up?? We will also have several investors in and out of the business. The investors will be of two kinds. One would be taking a personal mortgage loan and the other kind of investor will be investing personal cash from savings. In this case, does the corporation protect any of the investors and the owners?

Kenneth Allyn Sprang

Kenneth Allyn Sprang

Posted

The S corporation works fine and is probably the better choice here with multiple investors. You may wish to read my article here on AVVO regarding the choice of structure. There are potential tax advantages with an S corporation. If you are flipping houses you may not have to worry so much about separate LLC's, since you are not holding long. With an S corporation you have a few more administrative tasks, but they are minimal and won't take more than a few hours annually. The corporation will protect the shareholders from liability arising from the activities of the corporation, e.g., someone is injured in a house the corporation owns or there is some contractual or other claim asserted. The shareholder with the personal mortgage loan will be liable for it, of course. The shareholder putting in cash will be exposed only to the extent of the cash. That is, were there liability, he would stand to lose nothing more than what he put in. Of course, you should explore insurance coverage at least for bodily injury or property damage at a property owned by the corporation. There are various advantages of the corporation, but one of the chief ones is this limitation on liability. If anyone has a claim against the corporation he cannot assert the claim against any of you personally. Two caveats. First, to enjoy this limitation of liability you must operate like a business and keep minutes of board meetings, etc. (That sounds like a big deal, but it isn't--most can be done by written authorization without a meeting.) In addition, you must adequately capitalize the business which really means carrying insurance for you. If you have employees and were ever to owe 401(k) contributions, payroll tax, etc., then you would be personally liable if the company were to default. Of course, presumably if you have employees you will pay them and remit taxes, etc. in a timely manner.

Kenneth Allyn Sprang

Kenneth Allyn Sprang

Posted

I would respectfully disagree with Mr. Jackson. Although I think there are good reasons for holding title to real estate in an LLC, I think the parent company is well served by an S corporation. I simply think it makes governance and some other matters easier. I do agree that you need counsel in this matter, as setting up your own organization is a trap for the unwary.

Posted

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?

By Grace...
Shawn Jackson ESQ. (707) 584-4529
Business Development Attorney EMAIL: Attorneys@CaliforniaBusinessDevelopment.com
www.CaliforniaBusinessDevelopmentAttorneys.com
www.CaliforniaBusinessDevelopmentCenter.com
www.CaliforniaBusinessDevelopmentPlans.com
www.CaliforniaBusinessDevelopmentIncubator.com

No communication resulting herein shall create an attorney-client relationship unless a separate retainer agreement is signed by attorney and client. The information provided neither is legal advice nor is it conveyed in the course of an attorney-client relationship, but is intended merely as a general overview with regard to the subject matter covered. You should not act upon this information without seeking professional counsel such as any attorney in this office in a subsequent email communication (agreement) and the formation of an attorney client relationship.

Bryant Keith Martin

Bryant Keith Martin

Posted

This answer is so general that I don't see how it helps anyone. It just raises issues without any answers.

Shawn Regis Jackson

Shawn Regis Jackson

Posted

Mr. Bryant Martin: If you would like a more robust MEMORANDUM, just send an email request. By Grace... Shawn Jackson ESQ. Business Development Attorney (707) 584-4529 http://www.CaliforniaBusinessDevelopmentPlans.com <http://www.californiabusinessdevelopmentplans.com/> http://www.CaliforniaBusinessDevelopmentAttorneys.com <http://www.californiabusinessdevelopmentattorneys.com/> http://www.CaliforniaBusinessDevelopmentCenter.com <http://www.californiabusinessdevelopmentcenter.com/> http://www.CaliforniaBusinessDevelopmentIncubator.com <http://www.californiabusinessdevelopmentincubator.com/> Several Ways that We Help Businesses Be More Successful: Commercial Leases, Business Negotiations, Business Buy-Sell Agreements, Corporations & Limited Liability Companies, Business Start-Ups, Business Transactions, Business Models, Business Plans, Marketing Plans, Business Dispute Mediation, Licenses, Intellectual Property, Contracts, Internet, Creditors, Debtors. PLEASE BE ADVISED THAT EMAIL COMMUNICATIONS MAY NOT BE CONFIDENTIAL. IF YOU WISH TO RESTRICT YOUR COMMUNICATIONS TO CONFIDENTIAL INFORMATION, PLEASE CONTACT THIS OFFICE FOR FURTHER INSTRUCTIONS. The information contained within and attached to this communication is Attorney-Client Privileged and contains confidential information belonging to the sender (The Law Office of Shawn Jackson), which is legally privileged. We are required to inform you that we do not carry insurance at this time. The information is intended only for the use of the individual or entity named above. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this email or any of its attachment is strictly prohibited. If you have receive this email in error, please immediately delete it and notify us by telephone or via email to arrange for the destruction of the information contained herein. 707 584-4529. Please be advised that if you have requested (i.e. asked for advise) "legal services" or "business development services" from this office as reflected in this email, that the time it took to respond to your request is subject to our hourly billing ($60.00 to $240.00 per hour).

Posted

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 analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

Asker

Posted

What kind of agreement/contract should be drawn up for this kind of real estate investment business between partners/shareholders and a corporation??

Michael Charles Doland

Michael Charles Doland

Posted

As I mentioned above a buy-sell agreement and/or a management agreement. There is no "market" if someone becomes disabled, dies or just wants to leave and sell his shares. A buy sell agreement usually sets a formula for the buy out with a right of first refusal in the company, then in the other shareholders, then allowing sale to outside third parties. Some provisions may be manditory, requiring the company or the shareholders to repurchase. A management agreement sets forth what each party will do and what happens if an when a party does not. There are many great business lawfirms in the Bay area, and probably some listed on Avvo.

Bryant Keith Martin

Bryant Keith Martin

Posted

Congratulations! yours is the only answer that responds to the Q: Liability if sued by the investors? The individual shareholders who were involved in raising the investor's money probably have liability. Do the others?

Business topics

Recommended articles about Business

What others are asking

Can't find what you're looking for?

Post a free question on our public forum.

Ask a Question

- or -

Search for lawyers by reviews and ratings.

Find a Lawyer