Electing S Corporation status can appear to be, and may be, an attractive option for certain business owners.  For example, with an S Corporation election, the S Corporation may enjoy many of the advantages that otherwise exist with a C corporation, but avoid the double taxation associated with C corporations: first the corporate income tax on its profits and then shareholders being taxed again on profits distributed to them as dividends.

However, while an S Corporation election may permit business owners to avoid the double taxation of income associated with C Corporations, S Corporation business owners must also abide by the restrictions that come along with an S Corporation election.  Two such related restrictions are that an S Corporation:

1. can generally only have one class of stock; and
2. will not be treated as having more than one class of stock solely because of differences in voting rights among the shares of common stock.

But what if preferred stock would be desired as a part of a business owner’s estate plan?  [Remember that preferred stock generally entitles the holder to a fixed dividend, the payment of which takes priority over any dividends paid to holders of common stock.]  For example, a business owner might wish to grant preferred stock to children not active in the business, but permit children active in the business to be paid salaries and to reap the additional benefit of successful company performance through the payment of common stock dividends.  Alternatively, a business owner might wish to grant preferred stock to children active in the business with the logic that those most invested in the business should be the first ones to receive any profits from the business.  Such arrangements would not be permissible for S Corporation business owners.

How may S Corporation restrictions complicate the estate planning you may want to complete now, or down the road?  A great time to consider these questions is when first forming the business.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]