Software Club 210: Light Red/Club_Software_210_Light_Red_Micro_Star_1997.iso/sba/f308.sbe

Text File | 1997-01-01 | 17KB | 474 lines

@Q01

    IS MY COMPANY ELIGIBLE TO ELECT S CORPORATION STATUS?

An "S corporation" is merely a regular corporation that
has made an election on Form 2553 for federal tax purposes
to be taxed in a different way than other corporations (C
corporations).  Under state law, an S corporation provides
the same degree of limited liability as any other corporation.
In general, an S corporation is simply a corporation that
elects not to be taxed AT ALL.  Instead, its income or losses
pass through to the individual shareholders, who include such
income and (in most cases) such losses on their tax returns.
As such, an S corporation can, in many situations, save a
great deal in income taxes, as compared to a C corporation.
However, there are a number of technical requirements that
must be met to elect "S" status.

  QUESTION:  Is your corporation incorporated in the United
             States? (Or will it be, if your business is not
             now incorporated?)
@YN
01\Q03
02\Q02

@Q02

CONCLUSION:  It appears that your corporation will not
qualify to be an S corporation.  The requirements are
quite strict.

@BR\02

@Q03

INELIGIBLE TYPES OF SHAREHOLDERS:  In general, the stock in
an S corporation can only be held by individual persons or
their estates.

An S corporation cannot have any shareholders that are
corporations or partnerships.  If even one share of its
stock is owned by a partnership or another corporation, or
any other kind of entity other than a natural person (with
certain exceptions for trusts, or the estate of a deceased
person or an estate in bankruptcy), a corporation will not
be eligible to become an S corporation.  Or, an existing S
corporation will lose its "S" status if such an entity
becomes a shareholder.

QUESTION:  Will any of the stock of your corporation be
          owned by a partnership, another corporation, or
          by any other kind of entity (such as a pension
          fund), other than trusts, estates, or individuals?

@YN
01\Q02
02\Q04

@Q04

TRUSTS AS SHAREHOLDERS:  Trusts generally are not permitted
as shareholders of an S corporation, although there are a
few limited exceptions to this general rule.

  QUESTION:  Is any of the stock of your company held by
             a trust?

@YN
01\Q05
02\Q06

@Q05

TRUSTS PERMITTED AS SHAREHOLDERS:  While having a trust as a
holder of its stock will usually disqualify a corporation
from becoming or being an S corporation, there are several
exceptions, as follows:
  . Qualified Subchapter S Trusts.  A special kind of trust
    that makes an election to become such a trust and which
    must meet a number of technical requirements, to hold S
    corporation shares.
  . Grantor trusts or other trusts whose property is treated
    as owned by an individual for tax purposes, such as the
    grantor.  (Also often called "revocable trusts.")
  . Voting trusts, set up to hold stock of a corporation,
    primarily to control the exercise of its voting rights.
  . Testamentary trusts, which receive the stock of an S
    corporation under someone's will.  (But only for the 60
    days after the stock is received.)

QUESTION:  Does the trust that owns stock in your corporation
    come within one of the allowable exceptions listed above?
@YN
01\Q06
02\Q02

@Q06

  QUESTION:  Is any shareholder of your corporation a
             NONRESIDENT alien individual?

@YN
01\Q02
02\Q07

@Q07

AFFILIATED GROUPS OF CORPORATIONS:  An S corporation can't
be a member of an "affiliated group" of corporations, with
a few limited exceptions.

Thus, for example, if it owns 80% of the stock of another
corporation, it will not be able to qualify under the S
corporation rules.  (However, don't count stock it owns in
a dormant corporation that has not yet begun business and
has no gross income -- That's O.K.)  But a new law enacted
in 1996 now permits an S corporation to own 100% of certain
"qualified Subchapter S subsidiary" corporations.

  QUESTION:  Is your corporation a member of a group of
             "affiliated corporations"?

@YN
01\Q02
02\Q08

@Q08

PRIOR REVOCATION OF S CORPORATION STATUS:  If your
corporation was previously an S corporation and had its S
corporation election terminated (voluntarily or otherwise),
it may not make another election to become an S corporation
again until it has been a C corporation for five consecutive
taxable years (unless the IRS grants special permission).

  QUESTION:  Has your corporation previously been an S
             corporation, during any of its last 5 taxable
             years?

@YN
01\Q02
02\Q09

@Q09

NUMBER OF SHAREHOLDERS:  An S corporation cannot have more
than 75 shareholders at any given time.  If any of its
shares are held by joint tenants, or by tenants in common,
each such joint owner is counted as a separate shareholder.
However, each husband and wife pair who owns stock in the
corporation, regardless of whether they hold it jointly or
separately (or both), are counted as only one shareholder.
(Thus there could actually be up to 150 stockholders in an
S corporation, if its stock were owned by 75 married
couples.)

  QUESTION:  Are there more than 75 shareholders in your
             corporation, counted as described above?

@YN
01\Q02
02\Q10

@Q10

INELIGIBLE CORPORATIONS:  Certain types of corporations are
ineligible to become S corporations. Ineligible corporations
include:

  . Financial institutions (such as banks);

  . Insurance companies--this would mainly include life
    insurance companies--some casualty insurance companies
    would qualify;

  . DISCs or former DISCs (Domestic International Sales
    Corporations); and

  . Certain corporations that have elected to be Sec. 936
    corporations, that is, elected to be allowed a tax credit
    on income from Puerto Rico and from U.S. possessions.

QUESTION:  Is your corporation an "ineligible corporation,"
         as described in any of the categories listed above?
@YN
01\Q02
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@Q11

SECOND CLASS OF STOCK:  A corporation cannot be an S
corporation if it has more than one class of stock
outstanding.  An example would be a corporation that issues
both common stock and preferred stock.  However, just
because the common stock has differences in its voting
rights, such differences won't be considered to result in a
second class of stock, if all the shares of stock are equal
as to rights in the income and assets of the corporation.

Note that debt issued by the corporation, particularly if
the corporation is "thinly capitalized," may be characterized
by the IRS as a second class of stock, if it has "equity"
characteristics.  However, "straight debt" will not be
treated as stock for this purpose.

  QUESTION:  Does your corporation have more than one
             class of stock?

@YN
01\Q02
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@Q12

CONCLUSION:  It appears that your business, once it is
incorporated, may be able to elect S corporation status,
since it appears to meet all of the applicable requirements.
(However, many of the rules we have described in this
question-and-answer session are much more complex and
technical than you might suspect -- so consult a good tax
adviser before trying to elect to become an S corporation.)

To elect S corporation status, all of the corporation's
shareholders must consent by signing the election form, IRS
Form 2553.  The S corporation election form must be filed
not later than the 15th day of the third month of the tax
year for which it is to go into effect (that is, March 15th,
in most cases).  Some states may also require a separate
state filing in order to become an S corporation for state
income or franchise tax purposes.

  QUESTION:  Is your business already incorporated, as a
             C corporation?
@YN
01\Q14
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@Q13

That is fortunate.  Then you will not have to worry about a
great many complex problems that can arise upon changing a
C corporation over to S corporation status, provided that
when you do incorporat