Yes, a S-Corporation can enter into a partnership. While there are strict rules about who can be a shareholder in an S-Corporation, there are no strict rules about what the S-Corporation itself can own. An S-Corporation may own a partnership or LLC that is taxed as a partnership. If an LLC is owned by a single S-Corporation, the LLC is disregarded for tax purposes, and its income and deductions are added to the S-Corporation's other income and deductions.
For a detailed overview of S-Corps and how your business can achieve tax efficiency, read our guide: A Comprehensive Overview of S-Corporations (S-Corp)
S Corporation Ownership Rules
Ownership of an S-Corporation is limited to individuals, specifically U.S. citizens or permanent residents, and certain trusts and estates. Notably, business entities such as C-corporations and partnerships are excluded from holding ownership in an S-corporation.
LLC Ownership of an S Corporation
The path for an LLC to own an S-Corporation interest is not straightforward due to the stringent regulations imposed by the IRS on S-Corporation ownership. Let us look at how different types of LLCs behave towards S-Corporation ownership.
Multi-member LLCs
LLCs with multiple members are typically treated as partnerships for tax purposes unless they elect to be taxed as a corporation. Given that neither a partnership nor a corporation can possess an interest in an S-Corporation, multi-member LLCs might face restrictions on owning an S-Corporation.
Single-member LLCs
For single-member LLCs, the tax perspective plays a pivotal role. If the single-member LLC is taxed as a corporation or is owned by a corporation or partnership, it is barred from holding an ownership interest in an S-Corporation. However, if the single-member LLC is owned by an eligible individual—a U.S. citizen or permanent resident—ownership of an S-Corporation is permitted.
Can an S Corp. Own an LLC?
The dynamics of ownership extend both ways. Can an S-Corporation be a member of an LLC? While ownership requirements vary by state, generally, an S-Corporation is eligible to be an LLC member. The critical consideration, however, is the tax treatment resulting from S-corp. ownership of an LLC.
Tax Implications of S Corp. Ownership
In scenarios where the S-Corporation is the sole owner of the LLC (creating a single-member LLC), the LLC is treated as a disregarded entity. The income flows through and is taxed in the hands of the S-Corporation. In multi-member LLCs, the LLC is viewed as a partnership, and income is taxed as partnership income among its owners. If the LLC elects corporate taxation, it files a separate tax return. Notably, certain exceptions exist, such as employment tax liabilities and specific excise taxes, where the subsidiary retains a separate identity.
Procedural Step: Form 8869 Election
To formalize the subsidiary status, the parent S-Corporation must elect, using Form 8869, to treat the corporation as a qualified Subchapter S subsidiary. This election triggers a deemed liquidation of the subsidiary into the parent. However, it's noteworthy that the election can be revoked or terminated, leading to the treated subsidiary assuming a new corporate identity.
How Does an S-Corp. Benefit from Being an LLC Member?
From a tax perspective, there may not be a significant advantage to an S-Corporation owning an interest in an LLC. However, the flexibility offered by an LLC's management structure may be appealing to an S-Corporation, especially in negotiating ownership percentages independently of investment amounts.
Frequently Asked Questions (FAQs)
Q1: What is the significance of owning a subsidiary S-Corporation?
Owning a subsidiary S-Corporation allows the parent S-Corporation to consolidate its holdings and enjoy tax benefits. The subsidiary's existence is disregarded for tax purposes, streamlining financial management.
Q2: Can an S-Corporation join in filing a consolidated return with its affiliated C-Corporations?
While an S-Corporation can own 80 percent or more of a C-corporation's stock, it is ineligible to join the affiliated group to file a consolidated return. The intricacies of corporate structures play a crucial role in determining the feasibility of such filings.
Q3: What happens if the election of qualified S corporation subsidiary status is revoked?
If the election is revoked or terminated, the former subsidiary is treated as a new corporation, inheriting all assets and liabilities. This underscores the importance of thoughtful consideration before making such elections.
Forming an S-Corp with Our Expert CPA Services
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Disclaimer: This article does not constitute tax advice. Please consult Ahmed Baqir, CPA at Epsilon Accounting Solutions PLLC, before making any tax-related decisions or taking any actions based on the information provided in this article. Ahmed Baqir, CPA, has the expertise and knowledge to provide personalized advice tailored to your specific financial situation and goals.
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