Can an S Corp Own an S Corp: Everything You Need to Know
The answer to the question of "can an S corp own an S corp?" is yes, but it must own 100 percent of the shares of that S corp's stock and treat it as a subsidiary.3 min read
2. Tax Treatment of S Corporations
3. Owning Stock in Another S Corporation
4. Losing S Corp Status
5. Owning Stock in a C Corporation
6. Owning Stock in an LLC
7. Advantages of an S Corp Over an LLC
The answer to the question of "can an S corp own an S corp?" is yes, but it must own 100 percent of the shares of that S corp's stock and treat it as a subsidiary. An S corporation is a corporation established by state law that has elected to be treated under Subchapter S by the IRS for tax purposes. An S corporation may be called a Sub-S.
Many businesses opt for beneficial S corporation status because this type of business entity is not subject to corporate taxation on income. This election is made by filing IRS Form 2553. Congress initially created this designation to be used exclusively by small businesses. For this reason, the law only allow an S corporation to purchase shares of a second S corporation in rare and exceptional circumstances.
General Requirements for S Corporations
The U.S. Code indicates that an S corporation must:
- Have fewer than 100 shareholders
- Be incorporated domestically
- Be owned by individuals, estates, and/or qualified trusts
- Not be owned by corporations, partnerships, or nonresident aliens
- Issue only one class of stock
When one S corp has purchased all the shares of another S corp, the latter is known as a QSSS (qualified Subchapter S subsidiary).
Tax Treatment of S Corporations
When a corporation elects to be taxed as an S corp, it receives the benefit of limited liability protection. It also avoids the double taxation that is an issue for C corporations. These businesses must pay taxes on their profits as well as on the profit dividends they receive as shareholder income. With an S corp, shareholders simply report business profits and losses on their individual tax returns (pass-through taxation).
Owning Stock in Another S Corporation
Because an S corp must be owned by individuals, trusts, or estates, in general S corp stock cannot be held by another S corporation, a C corporation, an LLC, or a partnership. Purchasing shares of another S corporation voids that company's election of S corp treatment. This means that the company in question would be taxed as a regular corporation and thus be subject to double taxation.
With the exception described above, the S corporation must own 100 percent of another S corporation. The latter is no longer considered a separate income tax entity, and all its profits and losses are included in the tax return of the parent S corporation.
For example, if you own a landscaping business that is structured as an S corp and want to expand into the plant nursery business, you can form a second S corporation for the subsidiary business with your original S corp as the sole shareholder. This protects the original S corp from liability if the subsidiary is sued or becomes a financial failure.
Losing S Corp Status
If an S corp that owns a QSSS sells a share to another individual, trust, or estate, the QSSS will lose its S corp status and is thus subject to corporate taxes. What's more, it will be disallowed from regaining S corp status for half a decade.
Owning Stock in a C Corporation
An S corporation is allowed to own stock in one or more C corporations. If the S corp owns all the shares of a C corp, the latter is considered a subsidiary of the former. Purchasing C corp stock does not jeopardize S corporation status. However, profits and dividends will be subject to passive income limits unless the S corp shareholders actively participate in managing the C corp.
Owning Stock in an LLC
An LLC, or limited liability company, offers many of the benefits of a corporation without the stringent legal and administrative requirements. While only a single-member LLC can own stock in an S corporation, an S corporation can own an LLC. Because they are treated similarly for tax purposes, double taxation is not a concern. However, if an S corporation purchases stock in an LLC that has elected to be taxed as an S corp, the LLC may lose this beneficial tax status.
Advantages of an S Corp Over an LLC
Benefits of an S corporation that do not apply to an LLC include the ability to sell stock, to be sold or purchased, to declare benefits such as health insurance on their taxes, and the fact that a change in ownership does not necessarily affect management. .
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