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Kimberly
Kimberly, IRS Enrolled Agent & Tax Specialist
Category: Tax
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Experience:  Two Dual Master's Degrees in Finance/Budgeting & Accounting/Tax Law
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Can an LLC own a Sub Chapter S Corporation

Customer Question

Want to know if an LLC can own a Sub Chapter S Corporation? It's actually a two part question... if the LLC can own a Sub S, then can an EXISTING SUB S be transferred to a new LLC tax free?
Submitted: 8 years ago.
Category: Tax
Expert:  Kimberly replied 8 years ago.
Actually the problem lies with the requirements of the Subchapter S Corporation and the type of business and format of the LLC.

In order for the company to become and/or remain an S-Corp, ther are some very specific limitations.
(1) The company must be a domestic corporation
(2) It must be a 'small business' corporation
(3) There can be no more than 100 shareholders of the company.
(4) There can be only one class of stock.
(5) Shareholders of S corporations must be individuals except as provided elsewhere in the code governing the establishment of the S-Corp
(6) None of the individual shareholders may be a non-resident aliens.
(7) Exceptions to shareholders being individuals include:
      Certain Trusts - listed in the code
      Corporations - except as follows:
        A) a Bank
        B) an insurance company
        C) a corporation to which an election related to Puerto Rico Tax Credit applies

If the LLC meets all of the above requirements for being a shareholder, then it can be the sole shareholder of the S-Corp.

As far as tax-free treatment of the transaction, the purchase of the stock by the LLC would be tax-free to the LLC, but the sale of the stock by the shareholders of the S-Corp would fall under the regulations concerning Sale of Investments and Capital Gains.

This transaction must be at 'arms-length' in order to ensure that it is treated equitably should an audit occur. Therfore, everything must be at fair market value and all paperwork drawn up as though the S-Corp were selling it's stock to a new owner who wasn't originally an owner of the company in the first place.

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