Preserving S Corporation Status

Despite the advent of limited liability companies in Michigan, S corporations remain one of the most popular forms of business entity. S corporations have several advantages, but perhaps their most attractive feature is pass-through taxation. S corporation profits flow directly through to the shareholders, where they are taxed. C corporation profits, on the other hand, are taxed at both the corporate level and again when distributed to the shareholders.

Several requirements must be observed in order to preserve the valuable tax benefits of an S corporation, including the following:

  1. An S corporation can have only one class of stock. Differing voting rights are allowed, but in all other respects the shares of stock must be identical.
  2. All shares of stock must have the same distribution rights. If one shareholder takes a distribution, then at the same time every other shareholder must take an identical distribution per share.
  3. Only individuals and certain entities can be shareholders. If an individual shareholder’s stock is transferred to a trust upon that individual’s death, then the company’s S corporation status will be lost unless the trust contains special language and the stock is distributed out of the trust within two years.

If a company’s S corporation status is lost, then not only will the company be subject to the double taxation of a C corporation, but losses will not flow through to the shareholders and there will be a five-year waiting period before S corporation status can be reelected.

If you have any questions about achieving or maintaining S corporation status, please contact us here at Wright Beamer.

Recent Blog Posts

Love and the Law

Before the Sun Sets

Transparent Time