Does a Single-Owner C or S Corporation Offer Better Protection for an Asset Protection LLC?


Because of the difficulties with SMLLCs, some strategists suggest that you use a corporation instead to hold certain assets. However, there are some strong downsides to that method, from both a legal standpoint and a tax standpoint.

From a tax standpoint, here’s the problem with C Corporations: they don’t receive capital gains tax treatment. You’ll pay tax at the full corporate rate on any profits realized from the sale of an asset.

You’ll also get hammered if you decide to pull assets out of a C Corporation. They come out at fair market value, meaning the difference between the value when it went in, to when it came out, is taxable, again at C Corporation rates. And, if the only purpose of the C Corporation is to hold that asset, you’ve just taken away its reason for existence. You may wind up having to dissolve the Corporation, which means anything left inside comes to you as a liquidating dividend … and that gets taxed at your personal rate.

Life is a little better for assets in an S Corporation, but it’s still not a great choice. You won’t pay ordinary tax rates when you sell an asset to a third party, but if you pull the asset out for any other reason you’ll still pay tax on the difference between the original value and the current fair market value.

Could you avoid all this by simply selling the stock and leaving the Corporation intact? Sure – if you can find someone to buy your problem. Most of the time though, a buyer only wants the assets and doesn’t want the Corporation.

From a legal standpoint, it’s not good either. By moving into a Corporation you surrender the whole idea of Charging Order protection. The protections granted to LLCs are NOT granted to Corporations (except in Nevada, where S Corporation shares are protected by statute). That means your shares in a C or S Corporation are not safe from a judgment creditor. They could be seized and taken away from you. Once you lose control over your company’s stock, there is nothing to stop a judgment creditor from voting your shares in favor of liquidating the corporation’s assets to pay its debt.

Now, if there are enough other shareholders willing to vote against the proposal and together they out-vote your creditor, they may be able to save the corporation’s assets. But, on the other hand, if you are a corporation of one, or have majority control, your creditor can and will use this method to satisfy its judgment.

So, it’s not just because of the taxes that we recommend holding appreciating assets in an LLC. Not only is this business structure more tax-friendly, it’s more litigation-friendly, too.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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