Description

Although there are many benefits of choosing a partnership or LLC entity structure for a business, S corporation filings continue to significantly surpass filings of partnership returns. This often chosen structure has many caveats that businesses and tax advisers should consider to avoid jeopardizing shareholders and their flow-through tax status.

The operating agreement should contain provisions for identical distribution and liquidation rights in order to prevent disproportionate distributions and a second class of stock. The IRS recently issued Revenue Procedure 2022-19 stating that disproportionate distributions will not violate the one class of stock requirement as long as appropriate language is in the operating agreement.

Even initially, shareholders may fail to make or adequately make the election for S corporation status. Specific errors and late elections can be remedied without a private letter ruling under Revenue Procedures 2013-30 and 2023-1. The initial shareholder list could exceed 100, the maximum number, or include ineligible foreign shareholders. Tax practitioners working with S corporations must be wary of the ramifications of S corporation status and its pitfalls.

Listen as our panel of S corporation advisers reviews common issues with Subchapter S corporations and offers advice to avoid and rectify oversights.