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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4233
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Holding Company [subchapter S Coporation]owns a single member

Resolved Question:

Holding Company [subchapter S Coporation]owns a single member LLC ["SMLLC"]. The SMLLC had elected S Corporation status. 1) Can Holding Company be a member in a SMLLC that has made the Subchapter S election?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

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

NPVAdvisor :


  • From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration--fewer filings, fewer forms, fewer start-up costs, fewer formal meetings and record keeping requirements. ((THIS is what gets to your question about an S-corp being able to hold shares in another s-corp)

  • From a tax perspective, your enterprise will be treated as an S corporation. You'll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.

NPVAdvisor :

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)

NPVAdvisor :

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

NPVAdvisor :

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

NPVAdvisor :

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

NPVAdvisor :

Sotty ... here's the statute law: http://www.law.cornell.edu/uscode/text/26/542

NPVAdvisor :

(please forgive the typos)

Customer:

To confirm the LLC who filed the S corp. election can be owned by the Holding Company which is also an S corp.?

NPVAdvisor :

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

NPVAdvisor :

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

NPVAdvisor :

Questions?

Customer:

Therefore, for tax filing purposes the SMLLC files an 1120s and the Holding Company also files a separate 1120s?

NPVAdvisor :

yes

NPVAdvisor :

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

Customer:

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.

NPVAdvisor :

It is

NPVAdvisor :

You have an LLC and an S-Corp here

NPVAdvisor :

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

NPVAdvisor :

sorry state "law" level

Customer:

do you know what the case is in Florida?

NPVAdvisor :

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)

NPVAdvisor :

Hang on and let me check

NPVAdvisor :

New Florida Profit Corporation



      (Do not use this option to form a Florida Limited Liability Company, also known as an LLC. Use "New Florida Limited Liability Company" option below.)



New Florida Non Profit Corporation






New Florida Limited Liability Company or LLC



      (Do not use this option to form a corporation. Use "New Florida Profit Corporation" option above.)



New Florida Limited Partnership






Fictitious Name Registration






NPVAdvisor :

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)

Customer:

no change at the state level

NPVAdvisor :

Yep, just found it (this may get a little long, but here's the process you would have to have gone through)

NPVAdvisor :



607.1115. Conversion of another business entity to a domestic corporation


Currentness






(1) As used in this section, the term “other business entity” means a limited liability company; a common law or business trust or association; a real estate investment trust; a general partnership, including a limited liability partnership; a limited partnership, including a limited liability limited partnership; or any other domestic or foreign entity that is organized under a governing law or other applicable law, provided such term shall not include a corporation and shall not include any entity that has not been organized for profit.





(2) Any other business entity may convert to a domestic corporation if the conversion is permitted by the laws of the jurisdiction that enacted the applicable laws governing the other business entity and the other business entity complies with such laws and the requirements of this section in effecting the conversion. The other business entity shall file with the Department of State in accordance with s.(NNN) NNN-NNNN




(a) A certificate of conversion that has been executed in accordance with s.(NNN) NNN-NNNNand by the other business entity as required by applicable law.





(b) Articles of incorporation that comply with s.(NNN) NNN-NNNNand have been executed in accordance with s.(NNN) NNN-NNNN






(3) The certificate of conversion shall state:




(a) The date on which, and the jurisdiction in which, the other business entity was first organized and, if the entity has changed, its jurisdiction immediately prior to its conversion.





(b) The name of the other business entity immediately prior to the filing of the certificate of conversion to a corporation.





(c) The name of the corporation as set forth in its articles of incorporation filed in accordance with subsection (2).









Fla. Stat. Ann. §(NNN) NNN-NNNN(West)

NPVAdvisor :

If you have not doe this, you have an LLC with a special tax election

NPVAdvisor :

Question: Does the S-Corp holding company hold all shares of the LLC/Scorp?

NPVAdvisor :

only member, I should say

Customer:

Yes S-Corp. holding company does hold all the shares of the LLC/Scorp.

NPVAdvisor :

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. ...

NPVAdvisor :

See the very end of form 2553 in part III

Customer:

ok thank you

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4233
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 8 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.


Thanks Will

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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986