Legal Question in Business Law in California

Potentially, yes. When a business is failing, the members of the board of directors owe fiduciary duties to the corporation's creditors. Thus, if the board approves the distribution of cash or assets to the shareholders, the creditors can sue the board members personally up to the amount of the distribution.

Whether it was an "S" or a "C" corporation makes little or no difference - that is only an option you elect respecting how you want to be taxed. The basic rule is that a corporation that is winding up its affairs and going out of business must pay its creditors 100 cents on the dollar before the insiders (stockholders, directors, officers) get the first dime. See (for example) Corporations Code section 506. This will apply whether or not the corporation is failing. I also fully agree with Mr. Browning's comments.

To state the answers you have already been given, the answer is actually "no," unless you have done certain things wrong. One thing wrong is not maintaining an actual separate corporate entity. Many small corporations, whether S or C for taxes, wind up being run like the owner's sole proprietorship. If you have made that mistake, the creditors will likely be able to treat the corporation like a sole proprietorship too. If you have done things right, though, this should not happen. Second thing is what they have mentioned about distributions. If you wind up the company and liquidate the assets, and then take them for yourself and the other shareholders without paying the creditors, the creditors can go after you up to the amount of the distribution. But if you have run the business properly, and pay the creditors out any assets and liquidation, before taking money out for yourself, you should be protected.

One other thing to consider is that often creditors do not extend credit to corporations without personal guarantees from the owners. If you did that, they can come after you.