Better to keep most money in Personal or S-Corp account?
June 11, 2013 12:39 PM   Subscribe

My friend and I were talking the other day about the best way to arrange his personal and corporate accounts for his Corporation he formed to write and direct under. There are no employees and overhead is small to nothing. He says he feels better having the majority of his money in the corporate account in case he gets sued, but isn't that why most people DONT have all their money is that account? I thought most people in his situation started an s-corp to protect and keep their personal assets safe. Am I wrong?
posted by JJkiss to Work & Money (4 answers total) 2 users marked this as a favorite
I am not a lawyer. I am not an accountant. I have started several small businesses, and sought professional advice from both.

If he is the sole owner of the corporation, then if he is sued and has a judgement rendered against him, the corporation and the assets of the corporation can be forfeit to fulfil that judgement.

If the corporation is sued, and a judgement is rendered against the corporation, then only the assets of the corporation are forfeit.

So, yes, from a liability standpoint this makes no sense at all to me. I believe there are tax reasons why you might want to keep those assets in the corporate accounts rather than paying them out to shareholders ore employees (ie: yourself), but the obvious liability answer seems flawed.
posted by straw at 1:07 PM on June 11, 2013


Generally speaking, a corporation is like a person in that it can own property (including money in a bank account) and be sued for its wrongdoing (and for the wrongdoing of the corporation's employees).

Generally speaking, if an entity (either a natural person or a corporation) gets sued and loses, the entity's assets may be used to satisfy the judgment. If the suit-loser is a natural person who happens to own a corporation, then the corporation is an asset of the natural person, and that asset could be seized to pay off the judgment.

Generally speaking, if a corporation is closely held (e.g. it has a single owner), then it's more likely that a judgment against the corporation can be executed against the owner, or vice versa. If the corporation is not closely held, it's less likely that a judgment will cross entity lines like that. (E.g., if Google gets sued and loses, the plaintiff is not going to get any money directly from a person who happens to own some Google stock.)

Generally speaking, loosey-goosey accounting between a corporation and its sole owner makes it more likely that both the corporation and the owner will be unhappy if either of them gets sued.

Generally speaking, it is a good idea to speak with a lawyer admitted in your jurisdiction when planning and/or executing a business strategy, to be sure that you've dotted all the i's and crossed all the t's, so that your strategy has the best chance of working as you expect and desire.
posted by spacewrench at 1:51 PM on June 11, 2013

I agree with straw on the legal ramifications (I am also neither a lawyer, nor an accountant, but studied this in school).

I'm confused by your question -- is he concerned about personally being sued and losing the assets of the business or is he concerned about the business being sued and losing his personal assets?

If it is the former, I believe that the judgement could include the shares in the S-Corp (as an owner he is the 100% total shareholder. I supposed that would then give the new owners the right to do what they wish with the assets.

If it is the latter, the corporate veil should stand.

However, the tax implications of incorporation are different for an S-corp -- any profits/losses get filtered through the shareholders who pay their own income tax (instead of the double taxation of the C corp) -- he has to pay taxes on the reasonable dividend payment even if he keeps all the money in the corporate account.
posted by hrj at 1:55 PM on June 11, 2013

IANAL, IANAA. I am however the sole owner of an S-corp. I have never believed that corporate status protects anyone from liability, being sued, having judgments rendered and enforced, etc. I resisted incorporating for many years because no one could show me in black and white how corporate status could benefit me. Turns out it does benefit me if I am an employee of the corporation, which I am; pay myself a fair market value salary, which I do; pay federal and state income tax and social security / medicare on that salary, which I also do. The rest of the income flows to me as distributions and while it is subject to federal and state income tax, which I also pay, it is not subject to social security and medicare tax. Hence the savings. As to OP's original question, as an S-corp shareholder I have to pay tax on the corporation's earnings whether the actual dollars reside in the corporation account or my personal account, so I don't think tax-wise there's any meaningful distinction. I do, however, strictly account for the corporation's income and expenses separately from my personal income and expenses and every dollar of income is accounted for and relevant tax obligation paid. I also have a fully qualified CPA firm overseeing all of this. Hope this helps.
posted by charris5005 at 5:07 AM on June 12, 2013 [1 favorite]

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