S corporations have some major advantages for business owners, but they also have their fair share of complexities. One of the biggest complexities is whether or not an S corporation can own another S corporation. For example, if you have an EIN, then you could theoretically run two S corporations and have a second company to act as your holding company. This article will explain the intricacies behind owning another S corporation so that you can make an informed decision about your business venture.
What is an S corporation?
An S corporation is a type of limited liability company (LLC) that elects to have shareholders and the company itself as the owners of the business.
According to SCorp.org The IRS estimates that there are more than 5 million S corporations in the United States – three times the number of C corporations. Small businesses are the cornerstone of the American economy, and S corporations are the cornerstone of America’s small business community.
The shareholders elect the members of the board of directors and, in many cases, the board of directors elects the manager of the business. S corporations are fairly new and are only around since the mid-1980s, so there are not a lot of case law on the subject. S corporations are similar to C corporations in that both entities are businesses that have shareholders who are the owners of the business, but there are some key differences between the two types of entities. Some of the key differences include; S corporations are not required to have a management company – if an S corporation has shareholders, that is it. An S corporation is subject to taxation at the owner level, not at the management level.
Can S Corporations Own Each Other?
One of the biggest complexities of owning an S corporation is the question of whether or not they can own each other. This is a question that has not been answered in any case law or federal statutes. This may be because it has not come up in practice before, but it has been discussed in multiple articles and forums. One of the main arguments for owning another S corporation is that it cuts down on overhead costs. For example, if your business uses a C-Corporation as a holding company so that it has shareholders, then that means that you must have a separate LLC for each business. If the S corporation owns another S corporation, then you can have one owner for two separate entities. This reduces costs significantly because you only need two entities instead of two separate entities and two managers. However this could be seen as a con as well. If you owned a second S corporation you could not make decisions for the first S corporation because it is owned by another S corporation. Also, another S corporation could sue your first S corporation if they end up doing something that hurts your business.
Pros of Owning an S Corporation
Minimal Ownership
S corporations have no public ownership information, so they can be beneficial for those who prefer to keep a low profile. This is especially true if you are in a highly sensitive industry like healthcare or banking.
Limited Liability
An advantage of owning an S corporation is that the owners are not subject to full liability for the business’s debts, like they are with a sole proprietor. This is an attractive feature for many business owners.
No Filing Fees
One of the biggest benefits of owning an S corporation is that there are no annual fees associated with owning that type of entity. As a result, S corporations are a great choice for those with a low net profit.
No Annual Reports
Another benefit of owning an S corporation is that there are no annual reports that must be filed with the state or federal government. This can be a huge plus if you are looking to keep your business as private as possible.
No Annual Stock Take
One of the biggest pros of owning an S corporation is that there is no annual stock take. This can be a huge hassle for retailers who stock up on inventory at the start of a season and then must restock at the end of the season.
Cons of Owning an S Corporation
Reporting Requirements
One of the biggest cons of owning an S corporation is that there are many reporting requirements that must be met by the company. Owners must report the company’s quarterly and annual financials to the government. This can be a big hassle for business owners who prefer to keep their operations as private as possible.
Tax Compliance
Another con of owning an S corporation is that there are certain tax compliance requirements that must be met by the company. Some of these requirements include paying self-employment taxes and withholding income taxes for dividends and interest.
Ownership Dispute
Most states have laws that allow an S corporation’s shareholders to be sued if they do not agree on who should be the owners of the corporation. This can be a major hassle if there is a dispute between the shareholders.
Conclusion
The decision of whether to own an S corporation or a C corporation completely depends on the specific circumstances of each business. Overall, though, S corporations can be a great way for business owners who prefer a low-profile approach to ownership. If, however, you decide to own an S corporation, make sure you fully understand all the complexities of the situation.