of an S corporation
Two questions. Without jeopardizing S Corp status:
- Can an S corporation own less than 100 percent of an LLC?
- Can an S corporation be a part-owner in a commercial real estate
An S corporation is structured so that its income
is taxed to the shareholders. There are restrictions on who can
own an S corporation. There are generally no restrictions on what
an S corporation can own. Hence an S corporation can own less than
100 percent of a limited liability company. This is true even if
the LLC has elected to be taxed as a corporation instead of a partnership.
However, an LLC cannot own stock in an S corporation, and neither
can another S corporation or conventional corporation own stock
of the S corporation.
An S corporation can own a commercial real estate
building whether in part or in whole. However, certain S corporations
that own rental real estate can run into a tax problem.
An S corporation that has accumulated earnings from a period when
it was not an S corporation may have to pay a corporate level tax
on its passive income.
Accumulated earnings are corporate profits (from when the corporation
was not an S corporation) that have not been paid out to the shareholders
as dividends (hence incurring a second level of tax).
Passive income would include rental income from commercial
real estate. If passive income exceeds more than 25 percent of the
company's gross receipts for the year when it has accumulated earnings,
the passive income can be taxed at 35 percent. In addition, the
S corporation election will terminate after three years of being
subject to the passive income tax.
If the S corporation was always an S corporation,
this is not a concern.
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