Liability in S Corporations
Much like a C Corporation, liability lies with the “living" entity of the S Corporation. This means that the corporation is liable if sued or fined; liabilities of the company do not lie with the individual owners or stockholders. However, there is one caveat to liability with the S Corporation.
Suppose, for example, that a friend of yours owns stock in C Corporation XYZ and that the company is found to have illegally dumped toxic chemicals in the local water supply. Certainly, the liability and any damages caused by Corporation XYZ would be the responsibility of the company and not your friend. However, if the company is quite large, you wouldn’t look down on your friend for owning stock in a company for doing such as thing. He/she is far removed from the decisions of the managers entrusted to operate the company.
S Corporations, however, tend to be much smaller and owned by fewer investors, especially those S Corporations largely owned and operated by an entrepreneur. There is far less distance between the owners of the company and managers who run it. Stockholders in an S Corporation have a much greater proportional share of influence over how the company is run and who will run it in comparison to stockholders in a large C Corporation. Consequently, the owners of an S Corporation shoulder the stigma of any scandal, lawsuit, or fine much more so than owners of a C Corporation.
Although not financially liable for a lawsuit or scandal, owners of an S Corporation can be much more visible to the public than the millions of investors in a large C Corporation. The result can be some difficulty for S Corporation stockholders doing business elsewhere because of their ownership or dealings with ownership in the S Corporation. This can be a real factor when an investor is considering whether to invest in an S Corporation; he/she must often include the repercussions outside of just the financial losses associated with the liability of the S Corporation.