Q:

Subject:  C corp to S corp

Hello,

 

I am an investor/shareholder in a California "C" Corp.  The President of the corporation just informed me that he was going to convert to "S" Corp.  He advised me the stock certificate (issued under the C corp) which is in the name of my living trust would have to be reissued into the name of an individual(s).

 

Why would one change the status of the corporation.  Does this work in my (the shareholder's) benefit?  What about the inability to hold this asset in my trust.

 

After reading your article...I'm uncertain of why he would make this change.  Sounds a bit fishy.

 

I have a call into my CPA...but it is tax time and I just wanted a quick review if you have time.

 

Thanks a bunch,

A:

There must be more to this story than you've recounted here because some of it is literally impossible to do.

Specifically, one person can't unilaterally change a C  corp to an S unless he is the sole 100% owner.  The election form requires the signed consent by every single stockholder because this election obligates each stockholder to report his/her share of the corporate income on his/her own 1040. How is the president of a corp of which you are part owner forcing you to sign the election form without your being able to analyze its impact on your unique situation?

After discussing the pros and cons of making the S election with your own personal professional tax advisor, you can decide whether to go along with it or not.  I have no way of knowing if it makes sense for you or not.  There are too many issues to consider.

Assuming the election makes sense for you and you are going to sign the  IRS form, the next issue seems to be whether your shares can be titled in the name of your living trust.  This depends on exactly what kind of trust you have.  If it's a normal revocable living trust, which is generally considered to be a disregarded entity for tax purposes while you are alive, it shouldn't make any difference whether the shares are in your own personal name or the name of your living trust because both will be using your SSN for identification purposes.

If it is a different kind of trust, especially one that has its own FEIN and files its own 1041 tax returns, there are limits and restrictions on S corp ownership.  There are also special kinds of trusts that can own S corp stock if that is appropriate for your situation.  Your personal professional tax advisor can help you with that issue.

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2008 02:40:00 PM Send this post: