Don’t Lose Your S-Shares

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Guest authors: Hillel L. Presser, Esq., MBA and Ariel R. Enisman, Esq.

The LLC has eclipsed the corporation as the preferred business entity in most circumstances, especially in business planning that includes Asset Protection.

An S corporation is a business entity in which its shareholders invest in the corporation and share in its profits. However, the problem is, your personal creditors can easily seize your corporate shares, which is your ownership interest. If you own a controlling share, your creditor could control your corporation’s assets, which means they can vote, hire and fire, liquidate, or bankrupt the company. If you don’t own a majority share and you are sued, your partners could end up with a new undesired partner. Whenever we ask people what their biggest asset is they say their business. It is their cash flow that supports everything; their family, pays the bills, trips, college tuition, etc. Thus, if your business is structured as an S corporation it must to be addressed immediately so you don’t lose the business you have worked so hard for.

An ownership interest in an LLC has considerably greater creditor protection than shares in an S corporation, which can easily be seized by a stockholder’s personal creditors. This protection is attributed to the limited remedies a creditor has with regard to a debtor’s membership interest in an LLC. The majority of states have a charging order statute as a creditor’s remedy against an LLC member’s interest. Some states have a charging order as the exclusive remedy, but it may vary in the application to single versus multi-member LLCs. The charging order states that a creditor can only receive distributions payable to the debtor member. However, if you manage your LLC, you determine the distributions, and you can refuse to make a distribution. The creditor cannot force a distribution nor vote you out as manager. You can still compensate yourself and other members though salaries, withdraw money as loans, or take other compensation.

There are a number of ways to convert an S Corporation to an LLC. In the majority of cases the best way to convert an S Corporation to an LLC is through a statutory conversion, which is recognized in 25 states. In a statutory conversion, known as an F reorganization under IRS Code Sec. 368(a)(1)(F), by law, the entity remains the same, thus avoiding transfer taxes for the assets being transferred. Under IRS Code Sec. 361(a) and 357(a) there will be no recognized gain or loss.

Finally, because an LLC can choose to be taxed as an S corporation, it can be argued that the S corporation will become obsolete as a business entity.

It is imperative that you consult with your CPA and Asset Protection Attorney prior to filing any corporate to LLC conversion as the tax consequences for incorrect or incomplete filing can be severe. As a courtesy to all Daszkal Bolton clients, we extend the offer for a complimentary consultation with one of our attorneys at any time. Please feel free to call us at 561.953.1050 or email us at [email protected]. For more information, please visit:

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