C Corporations and Subchapter S Corporations
Corporate asset protection in the United States deals with two main types of corporations. There is the C corporation and the Subchapter S corporation. The C corporation is used by most major public stock companies. It can have unlimited shareholders and the shareholders can be both foreign and domestic in nature. These corporations typically have what is called the “double taxation” issue. This is because the corporation pays taxes and then when dividends are paid to the shareholders, they pay taxes a second time on the same profits.
For this reason, C corporations are not common among small business people. They will tend to use an S corporation where the profits are only taxed once. The corporation does not really pay taxes. The shareholders do, much like with a partnership. The S corporation has restrictions on the number of shareholders and who can be a shareholder, so they are not for everyone.
Corporate Asset Protection
From an asset protection point of view, the corporation does not offer a lot in benefits. A creditor can seize your stock ownership and thus your interest in the company. In an S corporation, if you are the sole shareholder they may seize all of your stock and thus gain access to all of the assets of the company.
The stock in a C corporation can be placed in a Limited Liability Company or an Asset Protection Trust in order to protect it. The stock in an S corporation is not so easily protected due to the limitations on ownership of the stock. Usually, the assets have to be distributed to another entity that in turn offers asset protection such as a Limited Liability Company, Family Limited Partnership or an Asset Protection Trust.
Another way assets can be protected is to have a strong buy/sell agreement between the shareholders. This can be highly effective, if properly structured, in preventing the creditor from gaining access to the assets.
Contact us for questions in this area and we will be pleased to assist you in drawing up your asset protection plan.