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Hi, yes, here the distinction between the LEGAL STATUS (a state law/corporations/business entity issue) of an LLC that has elected S-Corp taxation and it's TAX STATUS for purposes of federal income taxation is important
The holding company distinction, and its special definition of income and ownership, is not the rub here ... It's the fact that an S-corp cannot have a shareholder that's an S-Corp (unless you meet the qualified sub-S corp subsidiary rules)
But because the actual underlying business entity here is an LLC and organized that way, you have circumvented the issue, ... AS LONG AS you've very careful to OPERATE (again, we're not talking about tax reporting here) ... according to its (1) operating agreement and (2) any LLC statutes in Florida
Here's an excellent article about LLCs taking S-Corp election: http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-of-both.aspx
Ands here are the personal holding company rules, under IRC: http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-of-both.aspx
Sotty ... here's the statute law: http://www.law.cornell.edu/uscode/text/26/542
(please forgive the typos)
To confirm the LLC who filed the S corp. election can be owned by the Holding Company which is also an S corp.?
That's right, again, because the LLC isn't registered with the state as a corporation, it's an LLC, operating under an LLC operating agreement (that has elected to be treated as an S-Corp for TAX purposes) ... It would only be in the case where articles of incorporation, by-laws, etc were filed and the LLC actually changed it's underlying nature, that you would have the S-Crop being a SHAREHOLDER issue. I would takecare, again, to (as you have in your wording) treat the LLC as an LLC, with special taxation election, in all operational aspects
S-Corp election alone does not make the LLC an S-Corp. The nature of the business entity is a state law (corporations and business entity law) issue
Therefore, for tax filing purposes the SMLLC files an 1120s and the Holding Company also files a separate 1120s?
Again, tax reporting and entity organization are two separate issues ... but yes, if the LLC used form 2553 to make an S-corp election they will file 1120-S as well
I guess i am confused because in all the literature i have read it that is was prohibited for an S corporations to own stock in another S corporation.
You have an LLC and an S-Corp here
NOw, as I said before, IF AT THE STATE (secretary of state) LAS LEVEL, your LLC that's made an S-Corp election is actually recognized by the secretary of state as an S-Corp, THEN you have a problem
sorry state "law" level
do you know what the case is in Florida?
Federal tax law and state corporation/business entity law are two different issues UNLESS you actually made a filing with the state that changed the nature of the LLC to an S-Corp (which would have required designation of a board of directors or a director, officers, by-laws and.or articles of incorporation, etc)
Hang on and let me check
New Florida Profit Corporation
New Florida Non Profit Corporation
New Florida Limited Liability Company or LLC
New Florida Limited Partnership
Fictitious Name Registration
Note that the new filing options are only for corporations, LLCs or Partnerships - the implication being that the S-Corp itself is not a recognized entity ... (now hang on and let me see what the FL code has to say) .. in the mean time... Have you ever made any changes to the LLC at the state lever (with sec of state)
no change at the state level
Yep, just found it (this may get a little long, but here's the process you would have to have gone through)
If you have not doe this, you have an LLC with a special tax election
Question: Does the S-Corp holding company hold all shares of the LLC/Scorp?
only member, I should say
Yes S-Corp. holding company does hold all the shares of the LLC/Scorp.
OK, what you can do to insulate is make the section 1361(e)(3) election to be an electing small business trust (ESBT), see Regulations section 1.1361-1(m). For guidance on how to convert a QSST to an ESBT, see Regulations section 1.1361-1(j)(12). If these elections were not timely made, see Rev. Proc. 2003-43, 2003-23 I.R.B. 998. ...
See the very end of form 2553 in part III
ok thank you