An S Corporation is a designation you can seek for your corporation primarily for United States federal income tax purposes. To form an S Corporation, you must first file Form 2553 with the IRS.
According to Wikipedia.com:
“In general, S Corporations do not pay any income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.”
What does this mean for you?
In a nutshell, the major advantage of forming an S Corporation is that it allows the IRS to tax your business like a partnership or proprietorship, instead of a regular corporation. This is referred to as single taxation, unlike the double taxation that occurs with regular corporations.
Declaring Bankruptcy for an S Corporation
Although designating your corporation as an S Corporation will mean you’re not responsible for paying income taxes, this designation should not prevent you from filing bankruptcy, if necessary. For the purposes of filing bankruptcy, S Corporations are still considered corporations and would be afforded the same options other corporations have. However, if you are filing bankruptcy due to past or future taxable income, the bankruptcy and tax issues could become rather complex.
The Effect of Bankruptcy on S Corporation Shareholders
Typically, shareholders can be severely affected by the bankruptcy of an S Corporation and can suffer long-lasting consequences due to the corporation’s failure. Because the S Corp itself is not a taxable entity itself, its shareholders could be held responsible for any taxable income generated during and after the bankruptcy proceedings.
If you’re an owner or shareholder of an S Corporation that’s experiencing financial hardships, you should consult a knowledgeable attorney to discuss your options before you file bankruptcy.