s corp shareholders in s corp

[imjulier]

Hi-

Of course clients try to get the rest of their year planned out when we are busy with last year!

I have a client who is the sole SH in an s corp. He has a friend who is also the sole SH in his own s corp. They are in-process of forming a new LLC (in addition to keeping each of their individual s coprs)and want to know if their s-corps can be the SH in the new S corp. I think they can....any feedback? Also, are there any tax implications of them doing this? I tried to pass them off to an attorney and they said they had already talked to an attorney and he said to ask an accountant about the tax implications. I believe the attorney suggested to them that they should have the s-corps be the owners but this sounds like free advice from a friend to me since an attorney who does this kind of work would have known the answer about whether the s corps could be the SH. I've never had this scenario and just don't know anything about it except that I do prepare many s corp returns that pass thorugh to the 1040. How does the K-1 pass through to the s-corp? I looked in ATX to see if a K-1 input form could be added for any K-1s received by the s corp and this option doesn't exist.

Any info. you can share would be helpful.

Thanks,

Julie

[Margaret CPA in OH]

So kind of slow here today so I looked in my handy dandy Quickfinders for confirmation - LLC's are creatures of state law so you may want to check in your state first. Second, general partnerships (default for multiple member LLC's at the federal level) may have as partners individuals, corporations, trusts, estates, LLC's or other partnerships. Limited partnerships are formed at the state level and must have at least one general partner and one or more limited partners.

The wrinkle is that for S-corps, shareholders must be individuals, estates, certain trusts, and certain charities. Ineligible shareholders are corporations, partnerships (unless the stock is held as a nominee for an individual treated at the shareholder), LLC's, LLP's nonresident aliens and IRA's. Exception: Certain single member LLC's can be S-corp shareholders.

Muddy enough?

[imjulier]

Thanks Margaret. That was helpful info. I'll have to become more familiar with Quickfinders. Is there a seperate one for individual and business? Any chnace this is part of my ATX Max package? I'm sure I can check with ATX. And yes, that sounds muddy but probably confirms my suspicion that they haven't talked to a qualified attorney.

Thanks again, we'll see if anyone else throws in 2 cents.

Julie

[Margaret CPA in OH]

Yes, Quickfinders has separate Individual and Business volumes. They may have a combined volume now, too, but for many years I have gotten just the two. Twice I tried the alternative publication, also good, but prefer QF setup. Guess I'm old and stuck in my ways...

Very likely Intelliconnect, I think part of MAX, has this information. But that's online and it's easier, in this case, for me to just grab my QF because I knew exactly where to look.

[kcjenkins]

Julie, the S corps may be members of an LLC. And LLC may not be a stockholder in an S corp. So the way you are talking about setting it up will work. You want to double check your state's LLC laws first, of course. In CA for example, the LLC will have an $800 minimum franchise fee each year, something that the clients need to be made aware of in advance.

[OldJack]

>> s-corps can be the SH in the new S corp. I<<

Unless I misunderstand I do not believe you can. An S-corp cannot be a shareholder of a LLC that has elected to be taxed as a S-corp. That would terminate the LLC-Scorp status.

[imjulier]

KC and Old Jack-

Thanks for the input. I agree that s-corps can be memebrs of an LLC but that s-corps can not be the shareholders in another s-corp. I was going to communicate this to the client but they apparently couldn't wait 24 hours even for a definitive answer from me so went off and did whatever they wanted anyway. They set it up so the individuals are memebrs and we can then elect to be treated as an s corp. This is what I had suggested to them in order to keep all business and liability concerns seperate and advised that this was not my area of expertise so they should consult with an attorney if they really wanted the best answer. I guess they defaulted to what I suggested but whether or not this was the best answer, who knows? At least now we can proceed. Thanks for giving some input though....kinda chaps my hide when clients do this though.

Julie

[cred65]

This is taken out of context from a CPE course:

"An S corporation is also allowed to own a qualified subchapter S subsidiary. A qualified subchapter S subsidiary is a domestic corporation that is not an ineligible corporation (i.e., a corporation that would be eligible to be an S corporation if the stock were held directly by the shareholders of its parent S corporation) if:

(1) 100% of the subsidiary's stock is held by its S corporation parent, and

(2) The parent elects to treat it as a qualified subchapter S subsidiary (§ 1361 (b )(3)(B )).

Under this election, the qualified subchapter S subsidiary is not treated as a separate corporation. Thus, all the assets, liabilities, and items of income, deduction and credit of the subsidiary are treated as belonging to the parent S corporation (§1361(B )(3)(A))."

[cred65]

This is taken out of context from a CPE course:

"An S corporation is also allowed to own a qualified subchapter S subsidiary. A qualified subchapter S subsidiary is a domestic corporation that is not an ineligible corporation (i.e., a corporation that would be eligible to be an S corporation if the stock were held directly by the shareholders of its parent S corporation) if:

(1) 100% of the subsidiary's stock is held by its S corporation parent, and

(2) The parent elects to treat it as a qualified subchapter S subsidiary (§ 1361 (b )(3)().

Under this election, the qualified subchapter S subsidiary is not treated as a separate corporation. Thus, all the assets, liabilities, and items of income, deduction and credit of the subsidiary are treated as belonging to the parent S corporation (§1361((3)(A))."

PS: the first face sb B, the second b. What did I do wrong?

[Bart]

PS: the first face sb B, the second b. What did I do wrong?

You have to put a space between the "(" and the "b" and the ")". Like this ( b ).

[kcjenkins]

If you use the full reply option, and select to turn off the emoticons, you should not get the smily face. Or else put a space between the b and the ).

PS I fixed it for you.