Can an S Corporation Be a Shareholder in Another Corp?

Can an S Corporation Be a Shareholder in Another Corp?
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An S corporation is a specific type of corporation under U.S. tax law designed for small businesses. There are restrictions on who can own shares in S corporations, but there aren't restrictions on S corporations owning shares in other companies. An S corporation can even own another S corporation under certain circumstances.

Tips

  • Although there are very specific rules about who can own shares of an S Corporation, there is little legal ruling dictating what S Corps themselves can own shares in .

How S Corporations Work

Under federal tax law, there are two main types of for-profit corporations: S corporations and C corporations, named for different sections of the Internal Revenue Code. Either type of corporation is normally incorporated under state law, and eligible companies can choose to be taxed as S corporations if all shareholders sign off on a specialized tax form.

C corporations normally file and pay their own tax returns. Any distributions to shareholders, such as in the form of dividends, are taxed separately. S corporations file a specialized Internal Revenue Service form called 1120S, but their profits and losses are passed through to their owners, in tax terminology, and taxed through their shareholders' tax returns, not through the corporation. Eligible limited liability companies, another company form allowed under many state laws, can also choose to be taxed as S corporations.

S Corporation Restrictions

There are restrictions on the ownership structure of an S corporation. They can generally have at most 100 shareholders, though relatives and spouses are allowed to be counted as one unit in some circumstances, and their owners must be individuals or certain types of estates and trusts. That is, a corporation, LLC or partnership can't be a shareholder in an S corporation. There is an exception if an S corporation owns another S corporation, but in this case they're essentially treated as one entity for federal tax law.

They also can only have one class of stock, and must distribute profits and losses to shareholders effectively according to their ownership stakes, unlike C corporations which can have different classes of stock to offer to different investors.

S Corporations as Shareholders

While other companies generally can't own stakes in S corporations, there's no rule saying that S corporations can't own stock in C corporations. They can generally buy, sell and hold stock and other securities the same as any other corporation can. They can also own interests in partnerships or LLCs.

Generally, any profits and losses from trading securities and investment activity will be distributed to the S corporation's shareholders and taxed on their tax returns.