Sub-S Corporation Question

[DanaS]

I am an individual in Texas working out of my home for 15 years (self-employed doing computer work) with no employees. In 1986 my CPA advised me to form a Sub-S Corporation. I still do not know what the benefit of that was except that it allowed my CPA to quadruple my annual Tax-prep charges. Anyway, since 1986 that is how I have operated.

I filed Chapter 7 in September 2005, had my 341 in October and received my discharge in December. There is just one major problem. I have a hearing before the Judge and Trustee coming up in a few days because the Trustee has challenged that any of my business equipment which I was told by by Attorney would be exempt under tools-of-the-trade (valued at about $6500 last September and now worth maybe $5000 to the right buyers) is non-exempt. The Trustee states that an individual cannot operate a corporation as a dba in Texas and that the S-Corporation is a unique entity (I agree). He further states that because I am 100% shareholder in the S-Corp that he has a right to sieze ALL of my business related equipment - (apparently even equipment going back many years before I formed a corporation). If the corporation did not file bankruptcy separately, then how can it's assets be at risk because of my personal bankruptcy? I could see where he could lay claim to my stock in the corporation which is worth the piece of paper it is written on (since I am in a service business and the business is just me), but I do not see how he can go after the assets of a separate corporation entity. If it is determined that the assets are actually mine personally (as I "feel" they are) then as I understand they would be exempt as tool of the trade since I am way below the limits of exemptions. Perhaps the bigger question is why would anybody want a bunch of old-used and dated computer equipment - whatever they sell if for would mean nothing to my credtors at this point (I was paying all of them more than that every month in interest for years). As for me, without my equipment, I don't have a prayer of starting over from this point.

Any idea what I may be looking at as an outcome?

[JimH]

I own a C-corp and I just met with my atty's today to discuss what a personal ch 7 was going to do to my company. Incorporating or forming an LLC offers great protection to owners from outsiders - people you do business with, etc. The business entity is very vulnerable from the inside though. Control of the stock (ownership) is the weak point. The trustee does have control of your stock through the bankruptcy process since it is something you own. If the trustee sees that the corp has more assets than liabilities, they can and may liquidate the corp. Luckily my corp has substantial debt offsetting the assets, which makes mine really undesirable since the trustee has an obligation to pay all corp debt first before any proceeds from the liquidation can be used to cover personal debt. Mine's pretty bulletproof from the trustee - at least that's what my atty's tell me. Also corp assets are not exempt - only personal assets can be. I'm not sure what that means for your tools of the trade exemption. At least this is what I understand for Ohio - maybe Tex is different. Better talk to your atty or get another one if he hasn't already told you this.

[DanaS]

I met with 3 different attorneys prior to filing and all three said that in a worst case scenerio that I would have to dissolve my corporation (about 50 bucks) and start a new one if I wanted to after all was complete. All three said that it probably would not be necessary in my case, but a possibility. Keeping the corporation meant nothing to me except that I would have to print up new business cards, etc. if I had to dissolve it. Being a corporation has never brought me in a dime of business.

I believe that I chose the best of the 3 law firms I met with, but I was also told up front that I would not have to worry about losing my computer/digital equipment since that is what I use to make a living. I was also told that the Trustee would not be interested in electronic equipment and outdated software that is 2-15 years old - even the banks here only loan 15% on NEW computer equipment. On three occasions throughout this bankruptcy process (including immediately following the 341) I asked my Attorney if I needed to dissolve the corp to make things easier - since if these were personal assets they would be exempt as personal property below the threshold. In all three cases I was told "No". Then 2 weeks folowing the 341 I received a letter from the Trustee which was a copy of a motion he filed with the court claiming rights to sieze all my equipment. This triggered a response by my attorney which resulted in a hearing before a Judge next week. I asked my attorney once again about just dissolving the corp and got an answer of "Too late now". My attorney said that a worst case scenerio now would be that I may have to pay 50 cents on the dollar (of the $6500) to keep the equipment? So now I guess I either pay nothing and keep the tools of my trade, pay half price to get it back, pay full price to get it back, or lose everything (including my home and car) as a result of not being able to make a living any other way at this point.

Apparently there is a new Trustee in this district and the local attorneys have no prior experience with his thinking on such matters. Having met him breifly at the 341 I have no reason to question his personal methods or integrity - seemed like the right man for the job (one which I do not envy). However, I was told with the previous Trustee, this issue would never have been a problem. Therefore, I guess this really just comes down to whatever some stranger feels like on a particular day and that there are no clear lines in a case like mine - guess I just filed a couple weeks too late?

Every person I have contacted since this issue came up who has filed with a subS or even a C-corp have all been able to retain their equipment and never had to go before a Judge to fight for it. The frustrating part is that I was told by everyone up front that things would never come to this. After all we are still just talking about one used computer, a second-hand laptop and a digital camera! Even "I" will have to figure out a way to make enough money with them to replace them before summer if I am to survive in this business.

[JimH]

It sounds like it was all thought out well enough beforehand. It's probably not going to end as bad as it seems right now. It seems totally obsurd that he would take all of your older comp equip. Anymore you can't even give away a two year old computer. It probably should of been exempt though - maybe your whole corp could be considered your tools of the trade, making it exempt. Just a thought.

[DanaS]

JimH,

Thanks for the responses. Hope you are right. I will post the results next week (if I still have a computer)!