I think you’d want to consult an attorney about this.

Your situation, BTW, also shows why a shareholders agreement is important. You could possibly, in the absence of an agreement stating otherwise, sell a share to an ineligible shareholder and cause the S status to terminate.

Ronald,

The S corporations are simply partners in a partnership. The partnership conducts the business, does an 1065 partnership return, and sends its K-1s to the S corpoations that are partners.

The most recent primary source I could find in a quick search appears here: https://www.irs.gov/pub/irs-wd/201544020.pdf

And that source references another, old, more well-know revenue ruling, Rev. Rul. 94-43. (See “Law and Analysis” paragraphs of document I linked to.)

Hope that helps. The above references should let you start your thinking.

Steve

Hi Mark, Good questions… and here are my attempts to answer…

For the three women, if you create a partnership that’s got Diane holding her interest directly and then has Susan and Olympia holding their interests indirectly through an S corporation (so the partnership has as its partners Diane the individual, Susan’s S corporation and then Olympia’s S corporation), then Susan and Olympia can get the benefits of an S corporation. Diane can’t get those benefits obviously. But she never had the option because she isn’t an eligible S corporation shareholder. But Susan and Olympia can save payroll taxes, avoid Obamacare tax, etc.

For the two partners who don’t want to simply split profits by a constant, static percentage (X to Tom and Y to Jeff), the partnership structure lets them use whatever profit-sharing formula they want within the partnership… and then the one-shareholder S corporations pass that profit share through to their 100% ownerships. BTW, perhaps it helps to point out that you could not within a single S corporation allocate profits between Tom and Jeff like I described in the blog post.

Hope that helps.

———
“If three U.S. citizens, Olympia, Susan and Diane, want to operate their venture as an S corporation, for example, they probably can.

However, if it turns out that these three women want to form an S corporation but one of the woman—say Diane– isn’t a U.S. citizen or permanent resident then they can’t form an S corporation.”

Wouldn’t you want the non-citizen [Diane] to hold her shares as a corporation and the other two citizens as individuals rather than the other way around?

————-
“In a situation like this, you might like to create a profit sharing formula that worked like this:

The first $50,000 of profits goes to Tom.
The next $25,000 of profits goes to Jeff.
The next $75,000 of profits get split 2/3rds to Tom and 1/3rd to Jeff.
Any profits after that get split 50% to Tom and 50% to Jeff.”

How would having each guy own a sub-entity change the math? If each sub-corporation owned 50% of the business, how would you allocate profits to get the elaborate split they want?