Key Takeaways

  • S Corporation Ownership Rules: An S corp can own another S corp under specific circumstances, primarily by creating a Qualified Subchapter S Subsidiary (QSSS).
  • Tax Benefits and Structures: S corps offer tax benefits, including pass-through taxation and limited liability for shareholders, but must adhere to strict IRS rules.
  • QSSS Compliance Requirements: The parent S corp must own 100% of the subsidiary's shares for the subsidiary to qualify as a QSSS, ensuring cohesive tax treatment.
  • Losing QSSS Status: A QSSS loses its status if even a single share is sold, reverting to a C corporation for tax purposes.
  • Legal and Practical Considerations: Structuring an S corp with another as a subsidiary provides legal protections but requires careful adherence to IRS regulations.

Can an s corp own another s corp? It's a question many business owners ask as they establish the right organizational structure for their companies. The short answer is yes, but only under specific circumstances.

The biggest advantage of having a business structured as a subchapter S corporation is that it isn't required to pay corporate taxes on its income. The “S” in S corp stands for small business. S corps are designed to only be used by small businesses, so there are tight laws on who can own them and how they must be run.

S Corps and Taxes

If a corporation chooses to be treated as an S corp, it receives two major tax benefits from the IRS:

  • Limited liability protection for shareholders, the same treatment that is given to all corporation
  • Inability to be doubly taxed, which most C corps face

C corporations pay taxes on their profits and also pay dividends to shareholders. Shareholders are required to include dividends in their personal tax returns, which leads to double taxation. S corps don't pay corporate taxes on their profits, which means they pass the profits to the owners and are only taxed once.

Can an S Corp Own Another S Corp?

According to U.S. law, an S corp is limited to 100 shareholders or less. To be legal, shareholders must be U.S. citizens, legal residents, estates, or certain types of trusts.

In general, corporations aren't allowed to be shareholders. The only exception that allows an S corp to own another S corp is when one is a qualified subchapter S subsidiary, also known as a QSSS. In order to be considered a QSSS, all of the shares of the owned S corp have to be owned by one S corp.

As an example, if you have a computer repair business structured an S corp that has 20 shareholders and want to spread to the cellphone repair business, you can create a new S corp. Establishing the new business as an S corp protects the first business from being sued or being financially responsible if the new business fails. The original business can own the new business as an S corp if it owns all of the shares.

Alternative Entity Structures for Ownership

If creating a Qualified Subchapter S Subsidiary (QSSS) is not feasible, business owners may explore alternative structures. These options can provide greater flexibility in ownership while still offering legal and tax advantages:

  • C Corporation Ownership: A C corp can own shares in an S corp without restrictions, but it cannot elect S status itself. This allows for broader investment and expansion options.
  • LLC Ownership: An LLC may own an S corp if it is treated as a disregarded entity (i.e., single-member LLC owned by a qualified S corp shareholder). However, a multi-member LLC or one taxed as a partnership or corporation would not qualify.
  • Holding Companies: Forming a holding company (usually a C corp or LLC) can help centralize ownership of various businesses while avoiding the ownership limitations of S corps.

These structures may be appropriate for businesses with multiple revenue streams or investors, or those planning to raise capital more flexibly.

Benefits of Owning an S Corp as a QSSS

Owning another S corporation as a Qualified Subchapter S Subsidiary (QSSS) provides significant advantages for businesses looking to expand operations. These include:

  1. Liability Protection: A parent S corp can isolate risks by creating separate entities for different business ventures, ensuring financial and legal problems in one do not affect the others.
  2. Tax Efficiency: QSSS status allows consolidated tax reporting, with the subsidiary's income, expenses, and liabilities included in the parent company’s tax return. This simplifies compliance and eliminates double taxation.
  3. Streamlined Management: With unified ownership and control, a parent S corp can maintain operational consistency across subsidiaries, supporting strategic goals.

These benefits make QSSS arrangements appealing for businesses seeking scalable, tax-efficient growth.

QSSS Tax Treatment

According to the law, a QSSS runs the same way as an S corp. Each entity is viewed as distinct from the owners, which means that if the S corp that is owned runs into legal or financial trouble, the owners aren't held responsible and don't have anything more at risk than what they have invested in the business.

When it comes to taxes, the IRS basically doesn't act like the QSSS exists. The assets, liabilities, expenses, and income of the owned company are treated like they are part of the company that owns it. Because the parent company is also an S corp, it doesn't pay corporate income taxes on the profits that it makes or that the owned company makes. The profits from both companies are passed on to the shareholders who pay personal income tax on the dividends they receive.

Consolidated Reporting and Simplified Compliance

One of the main benefits of electing QSSS status is the ability to file consolidated tax returns. From a tax perspective, the IRS treats the QSSS as a division of the parent company rather than a separate taxable entity.

This treatment results in:

  • Simplified Recordkeeping: A single return consolidates income and deductions, reducing administrative burden.
  • Avoidance of Double Taxation: Since both entities are S corps and treated as one, profits are passed through only once to shareholders.
  • Uniform Tax Year: The parent and QSSS must use the same tax year, further simplifying filings.

However, it’s critical that the QSSS election is made timely using Form 8869 and that both entities maintain compliance with S corp rules.

Steps to Establish a QSSS

Creating a QSSS requires careful planning and compliance with IRS regulations. Key steps include:

  1. Ownership Requirement: The parent S corp must own 100% of the subsidiary’s shares.
  2. Election Filing: File IRS Form 8869, “Qualified Subchapter S Subsidiary Election,” specifying the subsidiary and effective date of the election.
  3. Compliance with S Corp Rules: Ensure the subsidiary meets all S corp eligibility criteria, such as having only eligible shareholders and maintaining a single class of stock.
  4. Maintain QSSS Status: Avoid transferring or selling any shares of the subsidiary, as this would terminate its QSSS status.

By following these steps, businesses can enjoy the tax and legal advantages of a QSSS while adhering to federal requirements.

Losing QSSS Status

The IRS is very strict with its rule that a QSSS has to be 100 percent owned by the parent company. As soon as the parent company sells even one share of its QSSS, the owned company loses its QSSS status.

The owned company also loses its S corp status because the ownership structure doesn't follow the legal requirements of an S corp, which means it then has to pay corporate income taxes. If an S corp loses its status, it isn't allowed to get that status back for five years.

Common Pitfalls to Avoid in QSSS Arrangements

Maintaining a QSSS requires ongoing attention to regulatory details. Common pitfalls include:

  1. Share Transfers: Selling or transferring even one share of the subsidiary invalidates its QSSS status, leading to higher tax liabilities.
  2. Eligibility Violations: Allowing ineligible shareholders, such as non-U.S. residents or other corporations, can jeopardize the S corp status of both entities.
  3. Misclassification of Stock: Offering multiple classes of stock can disqualify an S corp election.
  4. Failure to Update Records: Neglecting to file required updates with the IRS or state authorities can cause compliance issues.

Avoiding these mistakes helps businesses retain their tax benefits and legal protections under QSSS rules.

Restoring S Corp Status After Disqualification

If a QSSS or parent S corp violates ownership or structural requirements, the IRS may revoke S corp status. Common reasons include allowing an ineligible shareholder, issuing a second class of stock, or failing to maintain 100% ownership of the QSSS.

Once S corp status is lost:

  • The entity becomes a C corp by default and is subject to corporate taxation.
  • A five-year waiting period applies before the entity can reapply for S corp status.
  • IRS consent may be required for earlier reinstatement, typically only granted under exceptional circumstances.

To mitigate this risk, regularly review shareholder agreements and corporate bylaws, and consult a tax attorney before making structural changes.

S Corp Regulations

An S corp is a corporation that fulfills specific criteria to be free from paying corporate tax. In order to maintain that status, an S corp must follow detailed rules and do certain things, including:

  • Have fewer than 100 shareholders
  • Only have shareholders who are individuals, estates, or certain kinds of trusts
  • Only have shareholders who are U.S. citizens or legal residents
  • Have just one class of stock

S Corp Ownership Restrictions and Eligible Shareholders

The IRS imposes strict ownership rules for S corps to preserve their pass-through tax treatment. Understanding these limitations is essential before attempting to structure ownership across entities.

Eligible S corp shareholders include:

  • U.S. citizens or resident aliens
  • Certain trusts (e.g., grantor trusts, qualified subchapter S trusts)
  • Estates

Ineligible shareholders include:

  • Non-resident aliens
  • Partnerships
  • Other corporations (unless forming a QSSS)

Additionally, S corps may only issue one class of stock, although differences in voting rights are allowed. This restriction is particularly relevant when planning subsidiary structures or equity distributions.

Frequently Asked Questions

  1. Can an S corp own another S corp directly?
    Not directly. An S corp can only own another S corp if the owned entity is a Qualified Subchapter S Subsidiary (QSSS), meaning 100% of its stock is held by the parent S corp.
  2. What happens if a QSSS sells even one share of its stock?
    It immediately loses its QSSS status and its S corp status, becoming a C corporation for tax purposes and potentially subject to double taxation.
  3. Can an LLC own an S corp?
    No, unless it’s a single-member LLC owned by an eligible S corp shareholder. Multi-member LLCs and partnerships are not qualified S corp shareholders.
  4. What are alternatives to using a QSSS?
    Businesses can consider forming C corporations, single-member LLCs, or holding companies to achieve flexible ownership and investment structures.
  5. Where can I get help setting up a QSSS or S corp structure?
    You can find a qualified attorney on UpCounsel to help you establish and maintain proper S corp or QSSS compliance based on your business goals.

If you need help knowing if an S corp can own another S corp, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.