Can Living Trusts Own S Corporation Stock?

By Sarah Barton

An S corporation is simply an ordinary corporation chartered under state law whose shareholders have decided to make a special tax election under the Internal Revenue Code. One of the main advantages of forming an S corporation is the avoidance of double taxation. An S corporation's profits and losses are reported only on its shareholders' personal tax returns. The business itself is not required to pay taxes, unlike a typical corporation. Because of these advantages, the Internal Revenue Service has certain limitations regarding the corporations that qualify for S corporation status.

An S corporation is simply an ordinary corporation chartered under state law whose shareholders have decided to make a special tax election under the Internal Revenue Code. One of the main advantages of forming an S corporation is the avoidance of double taxation. An S corporation's profits and losses are reported only on its shareholders' personal tax returns. The business itself is not required to pay taxes, unlike a typical corporation. Because of these advantages, the Internal Revenue Service has certain limitations regarding the corporations that qualify for S corporation status.

Shareholder Restrictions

In addition to limiting the size of an S corporation to no more than 100 shareholders, the IRS restricts the types of shareholders permitted to own stock in an S corporation. Individuals, estates, certain exempt organizations such as nonprofits, and specific types of trusts are the only shareholders eligible to qualify for S corporation status. A living trust that meets the eligibility requirements of the Internal Revenue Code can own stock in an S corporation.

Ready to incorporate your business? Get Started Now

Certain Living Trusts Permitted to Own Shares

The Internal Revenue Code limits the trusts eligible to hold S corporation stock to certain types of domestic trusts. A living trust, which is simply a trust that comes into existence during the lifetime of the person creating the trust, qualifies to own S corporation stock as long as it meets the requirements of a Subpart E "Grantor Trust" under the Internal Revenue Code.

Grantor Trust

Under the Internal Revenue Code, a grantor trust eligible to be an S corporation shareholder must be one that is designed to be treated as entirely owned by one individual who is a United States citizen or resident. That is, for federal income tax purposes, all of the ordinary income and income allocated to the trust's assets is viewed under the law as being owned by the individual who created the trust. The individual deemed to be the trust owner is considered the shareholder of the S corporation, rather than the trust itself. A living trust that meets these requirements is eligible to be a shareholder of an S corporation.

Death of the Owner

A grantor trust continues to be eligible to own stock in an S corporation for two years after the death of the owner of the trust. At that point, the grantor trust ceases to be an eligible stockholder. The continuation of the corporation's S election depends on whether the trust meets the requirements of other types of trusts permitted to own S corporation stock. If the trust ceases to qualify as an eligible S corporation shareholder, its ineligibility results in the termination of the corporation's S election. The corporation then will be subject to double taxation under the Internal Revenue Code.

Ready to incorporate your business? Get Started Now
S Corporation Regulations

References

Resources

Related articles

S-Corp Shareholder Requirements

An S corporation is a business that has made the election to be taxed as a pass-through entity, meaning that each shareholder reports her portion of the business's income on her personal tax return. However, noncompliance with the shareholder limitations could terminate the S corporation election, causing the company to be taxed as it was before the election. For example, if the company was a C corporation before the election, it goes back to being taxed as a C corporation. Instead of the company’s income being taxed just once, it’s hit with the corporate tax when the company makes the money and with the personal income tax when the company distributes it to shareholders.

Taxes on a C-Corp Liquidation

When a corporation ceases its business operations, all assets owned by the company must be distributed. This process is known as liquidation and is necessary, even in cases when the corporation is being sold or converted into a different business structure. As part of every liquidation, state and federal income, payroll and capital gains taxes must be paid at both the corporate and individual levels.

S Corporation Qualifications

Many small businesses elect to be treated as S corporations. This is often a smart business decision because with an S corporation, the income and losses from the business flow through to the owners rather than being taxed at the corporate level and then taxed a second time at the individual level. Not all businesses qualify for this election, however. The Internal Revenue Service publishes guidelines that can be used to determine whether a business is eligible to convert to an S corporation.

LLCs, Corporations, Patents, Attorney Help

Related articles

Can a Trust Be a Share Holder of an S Corporation?

An S corporation is a corporation that meets several restrictions and elects to be taxed as a partnership. One of the ...

Can a Trust Own an S Corp?

An S corporation is a business that elects to obtain a special tax status granted by the IRS. Most businesses that can ...

Subchapter S Corporation Stock Regulations

S corporations are ideal for companies with few owners who would rather report the income on their own tax returns ...

S Corporation Compliance

Corporations that meet the qualifications to be an S corp can be taxed as a pass-through entity. This allows the ...

Browse by category