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S-Corporations > Documents Required - Pg. 27

First Steps 27 A potentially graver consequence of S-corporation taxation is that shareholders must declare their share of corporate profits whether or not said profits have been distributed . Thus, a cash squeeze could arise for an investor if the corporation retains profits but the shareholder must pay taxes on the profit. Quick Example: Use the numbers from the example above, but change the $100,000 loss into a $100,000 gain. If the corporation stockpiles all of the profit, Shareholder A will feel the pinch of owing income tax on both his $30,000 salary and his $65,000 share of the profits, even though he has not received any of that money. Liability With some exceptions, shareholders, directors, and officers are protected from lawsuits and per- sonal liability arising from their actions in connection with the company by what is known as "the corporate veil." If the company goes bankrupt, creditors cannot look past the corporation's assets to the owners for satisfaction of debts. If money damages are awarded to a party suing the corpo- ration, that party cannot look to the owners for the award. Generally, shareholders, directors, and officers can only be held liable for the debts of the corporation if a court finds that they used the corporation to intentionally perpetrate a fraud or injustice. See Sidebar: Seven Simple Liability Pre- cautions in this chapter for tips on how to keep your veil intact.