Both corporations and LLCs provide asset protection in that the owner will generally not be responsible for debts of the entity. But when it comes to protecting an owner’s personal assets from his or her personal creditors, an LLC generally offers better protection than a corporation. A creditor who controls the stock of a corporation essentially controls the whole corporation. A creditor attempting to gain control of an owner’s LLC interest has a much more difficult task. The creditor can generally obtain only a charging order against distributions from the LLC.
Given the advantages of an LLC for certain asset protection purposes, a number of our clients have recently been converting S corporations to limited liability companies. There can be serious tax and other consequences to this kind of conversion so it should only be done with the assistance of a qualified professional.
The conversion can be a liquidation for federal income tax purposes. This may not be the case, however, if you elect to have the LLC taxed like an S corporation. Again, there are a number of very technical tax implications that have to be addressed in connection with any such conversion. But in a number of situations there will be clear advantages to converting an S Corporation to an LLC to provide better asset protection.