S-Corporation Bankruptcy and Personal Liability
Why do corporations file bankruptcy?Corporations generally only file Chapter 7 to liquidate assets, or Chapter 11 to reorganize. Only real people, not corporations, can receive a discharge. Therefore, S-corps rarely file bankruptcy, since they often have no assets to liquidate in Chapter 7, and reorganization under Chapter 11 is rarely an option due to negative cash flow and inability to become a profitable business, even if leases and contracts were modified in Chapter 11.
If I am the only shareholder or officer in a small corporation, or Subchapter S Corp, should I file bankruptcy?Officers of corporations only have personal liability if they (1) failed to follow corporate requirements, which are governed by state law, or (2) they signed personally for corporate debts, or (3) they are liable by operation of law.
Examples of this are:
(1) The corporation did not pay the annual fee and was dissolved but continued to operate, or other corporate formalities were ignored
(2) The bank required an officer or shareholder to personally guarantee a corporate debt
(3) There is a judgment personally against an owner or officer, or the officer is liable for withholding taxes that he or she did not pay.
If my S-Corp is out of business, do I need to file bankruptcy on the debts?Only if you are personally liable in some way. If you are not, you simply pay the outstanding debts out of the assets, and wind up the corporation according to state law. "S-Corp" status is simply an IRS designation for tax reporting. If the corporation has debts, but there is no one to collect them from, then there's no reason to file bankruptcy for the corporation unless there are corporate assets to liquidate. Specific advice on this situation should still be obtained from a local bankruptcy attorney, since this is general information only.
If I signed personally on a debt for the corp, or owe sales tax or employee withholding, what happens?Bankruptcy will not eliminate personal liability for corporate offices that failed to turn over sales tax and withholding taxes, and other "trust fund" taxes. Bankruptcy may eliminate personal liability for debts that a corporate officer signed personally on or gave a personal guarantee for.