Can a Trust Own an S Corp?

An S corporation is a special corporation with certain tax advantages. For instance, an S corporation transfers income to shareholders who pay taxes on their percent share ownership. However, an S corporation has certain restrictions. A shareholder in an S corporation must be a live person. Therefore, a regular trust may not own shares in an S corporation unless it elects to operate as special type of trust.

S Corporation

An S corporation is a corporation that qualifies under the special federal tax election under Subchapter S of the federal tax code. An S corporation pays no federal tax. Instead, an S corporation shareholder simply calculates his percentage share ownership of the company's income and losses on his personal tax return. Thus, an S corporation avoids double taxation. In contrast, a C corporation shareholder pays double taxation on the corporate and personal level when the company issues a dividend. However, an S corporation faces several restrictions. The maximum number an S corporation may have is 100. An S corporation faces a limit of only one class of common stock and must be geographically located within the United States.

Who Can Own S Corporation Shares

One of the other limitations of an S corporation is the restriction of owners of the stock to live persons. In other words, an S corporation shareholder must be an individual. Therefore, a regular trust, corporation, partnership, LLC or another S corporation cannot be a shareholder in an S Corporation. In contrast, anyone may own shares in a C corporation, including a trust.

Grantor Trust

There are usually exceptions that govern tax laws, and trust ownership in an S corporation is one of them. A trust must be a special type to own stock in an S corporation. Because of this, the IRS plays close attention to special trusts. A grantor trust is eligible to own shares in an S corporation. A grantor trust is one where the grantor maintains interest in the trust assets or income of the trust. The grantor is the owner of the trust for federal tax purposes and assumes tax liability for income and losses of the trust. The grantor, beneficiary or trustee need not make an election to be a shareholder of an S corporation so long as the grantor is a U.S. citizen or resident.

Qualified Subchapter S Trust

A valid Qualified Subchapter S Trust must meet certain federal requirements and the beneficiary must be on board in making the S corporation election. To receive shares in an S corporation, a QSST must have only one income beneficiary who is the only person designated to receive trust income. Only the beneficiary may receive the actual S corporation stock.

Electing Small Business Trust

An Electing Small Business Trust is the only trust that can hold S corporation stock, have multiple beneficiaries and allow the trustee discretion over distribution without losing S corporation status. However, an ESBT must adhere to strict guidelines, such as all beneficiaries must be qualified S corporation shareholders and the trustee must elect to have trust taxed separately at the highest income tax rate.

References

• Lawyers.com: S Corporation Trusts
• IRS.gov: Abusive Trust Tax Evasion Schemes -- Special Types of Trusts
• BizFilings: S Corporations vs. C Corporation -- A Comparison
• Law Office of Unruth, Turner, Burke and Frees; Owning S Corporation Shares in a Trust: QSST, ESBT or Grantor Trust; Douglas L. Kaune; March 2010