There are some big things that can trigger the loss of the S Status such as having  more than 100 shareholders, transferring stock to any entity that’s not a qualified shareholder such as C Corporation, certain ineligible trusts, partnerships or non-resident alien. Then there are some little or not-so-obvious things that can inadvertently trigger the loss of the S Status. When I say little things, I mean those that the business owner is not completely aware of or authorize. Example of such things are inadvertently creating a second class of stock, having an S Corp shareholder whose S Status was terminated who then became a C Corp (C Corps are not allowed to be shareholders) and acquiring a subsidiary or other than certain non-operating subsidiaries.  The last two are also small things because while they can be avoided when initially organizing the company, things can later on happen that can trigger them 

Creating a second class of stock. It Can happen inadvertently when debt is structured in a way that allows for future or circumstantial ownership of the S corporation by the lender, for instance, a loan that can later be converted to stock will be considered a second class of stock. This is considered one of those little things, because it is a detail  not expressly stated in the requirements of being an S Corp, only that the S Corporation cannot have more than one class of stock.  There are many other ways where a second class of stock might be inadvertently created if the owner is not adept or experienced in structuring capital, which of course is the case with many small business owners.   

An S Corp shareholder whose S Status was terminated and them became a C Corp. This is one of those double whammies.  An S Corp with an S Corp for a shareholder has double the risk of losing its S-Corp status, If an S Corp shareholder is owned by another individual and something happens with that individual which causes the loss of the S Status for his/her company, then the owner(s) of the first S Corp have just inadvertently had a C Corp as a member, and will trigger the loss of their S Status.  The same applies if the two S Corps were owned by the same individual.   

Acquiring a subsidiary or other than certain non-operating subsidiaries. There are many business transactions an owner can get into, whether to get more business, more capital etc and many business owners are entrepreneurial with dreams of building an empire controlled by one entity. Unless this is structured properly, it can trigger loss of the S Status.  Another scenario is owner might decide to get into an joint venture which effectively results in the owner acquiring the other company. These ‘little things’ are by no means comprehensive, nor do they describe the complete picture for each company.  Please feel free to reach out to us to get clarity on your particular situation, and of course, watch out for more blogs and especially our next one… So What happens when your S Corporation Terminates?. You've got questions?! Got comments?! You got ’em, you got’em…. Contact us! We want to know your experiences with S Corporations, whether just starting out, just switching, been an Scorp all these years, or just researching...and the rainbows in between!