Potential Advantages of an S Corporation

One of the biggest advantages of forming a corporation is the elimination of double taxation issues. With an S corporation, both profits and losses get passed on to the shareholders, and therefore, taxes are paid only once. Depending on the state you plan to operate in, S corporations may or may not be recognized, and could be taxed by the state as traditional C corporations, or some states may charge a state tax even though there is no federal tax being charged.

S corporation shareholders can work as employees and take their own salary. They can also receive distributions and dividends from the business that are tax free, up through the amount of their investment amount. Reasonable amounts for dividends and distributions can help provide a reduction in self-employment tax liability.

Another advantage is limited liability status with S corporations. Shareholders have protection against liability for the company’s liabilities and debts. Shareholders are only liable up to the amount is of their investment, and their personal assets are protected against the debts and liability of the business.

S corporations sell stock to raise capital and have an unlimited life, as ownership is defined by shareholders. In other words, it will continue to exist and remain in operation. The S corporation is not influenced by the death or departure of one individual director, owner, or founder.

Potential Disadvantages of an S Corporation

If you plan to do business in Washington D.C., note that the District does not recognize the federal S corporation status and there is no state-level S corporation election option. What this means is you can still have an S corporation, but it’s only an S corporation as far as federal taxes are concerned. For state taxes, the business will be treated like a traditional C corporation.

S corporations have strict restrictions on who can be a member. Members cannot be a non-US citizen, a corporation or another LLC. The strict membership is only a portion of the strict rules on S corporations. An S corp can’t have more than 100 shareholders and cannot issue more than one class of stock. Because there is only one class of stock, the business cannot allocate income or losses to certain shareholders, unlike an LLC that can allocate money however they set forth in their operating agreement.

The IRS pays closer attention to S corporations, especially because they can distribute dividends or a salary. The IRS wants to ensure the salary given to the shareholders is realistic and they aren’t just trying to reduce taxes.

Forming an S corporation takes a few extra steps versus a traditional C corporation. You start by filing for a traditional C corporation and then there are some additional requirements like annual reports and franchise tax fees in some states. S corporations are required to adopt a calendar year for taxes unless it can provide a valid reason it should be a fiscal year.

Washington DC Business Attorney

If you have questions on which business structure is right for you, it’s best to speak with a qualified Washington DC business attorney. The team at Tobin O’Connor Concino P.C. have years of experience helping businesses get started. Contact our office at 202-362-5900 to set up a consultation.

In general, it takes pretty egregious acts for a court to waive the corporate shield. Often these acts are committed by closely held corporations, especially ones that are attempting to use the corporate entity as a front for their personal endeavors.

Characteristics Involved

Some of the characteristics that tend to be involved in cases where piercing the corporate veil include:

• Insufficient business capital for what the nature and risks are of said business
• Non-compliance with corporate formality requirements, like issuing stocks and holding required meetings
• Mixing corporate assets with personal business of shareholders
• Fragmenting the business into separate corporations excessively
• Creating a corporation with the sole purpose to avoid existing obligations
• Dominant shareholder siphoning off corporate assets
  

Alter Ego Theory

A term often used in conjunction with piercing the corporate veil is the alter ego theory. This is where the plaintiff’s attorney attempts to extend the reach of liability to additional parties by claiming they were “alter egos” of the primary defendant. These additional entities may be subsidiaries or affiliates of the corporation. By bringing in additional defendants, it can greatly expand shareholders’ personal liability beyond the available corporate assets.

To establish an alter ego claim, generally two elements have to be established. One is proof of a unity or ownership that shows the corporation and shareholder exists, and the other is that there will be inequitable results if these acts are treated as those belonging to the corporation only.

Commingling Funds

Commingling funds, or mixing corporate and personal assets, is one of the most common reasons creditors can pierce the corporate veil. It’s a breach of fiduciary duty and it is a big violation in keeping the corporation a separate legal entity. An example would be when you deposit corporate funds into your personal bank account. Or, when you make withdrawals from your business account to pay personal debts without proper documentation. Other examples would be using the same bank account for both personal and business needs, and moving money back and forth between business and personal accounts without any documentation.

Hiring a Washington DC Business Lawyer

The experienced business law team at Tobin O’Connor Concino P.C. is available to help you with all your Washington D.C. business organization needs. Our specialized team can ensure you learn how to protect your corporation or LLC and reduce your risk from piercing the corporate veil. Contact us at 202-362-5900 and make an appointment to meet with one of our attorneys today.