{"id":4005,"date":"2016-12-26T06:39:10","date_gmt":"2016-12-26T14:39:10","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=4005"},"modified":"2024-08-30T10:35:24","modified_gmt":"2024-08-30T17:35:24","slug":"s-corporation-partnerships","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/s-corporation-partnerships\/","title":{"rendered":"S Corporation Partnerships Let You Break Rules"},"content":{"rendered":"

\"S<\/a>I want to talk about S corporation partnerships in this week’s blog post.<\/p>\n

And here’s why: S corporations provide great tax savings, but unfortunately they come with some pretty severe restrictions: limits on numbers of shareholders, rigid rules about splitting profits, and then tight restrictions on the sort of people who can become owners.<\/p>\n

However, you probably have a workaround to most or even all of these restrictions. You can use an S corporation partnership… by which I mean, just to be clear, a partnership that has as its partners, S corporations.<\/p>\n

In this blog post, therefore, I\u2019m going to identify the three big restrictions on S corporations and then describe how you can use an S corporation partnership as a workaround.<\/p>\n

Tip:<\/strong> Use our free S Corporation Tax Savings Calculator<\/a> to estimate S corporation tax savings for your specific <\/em>situation. <\/p>\n

S Corporation Partnerships & Limit on Shareholders<\/h1>\n

Let me start off with the limit on the number of shareholders restriction. As you may know, tax law limits the number of shareholders an S corporation may have to 100 shareholders. You can\u2019t have an S corporation with 200 shareholders, for example. Or one with 1000 shareholders. Those shareholder counts break the rule.<\/p>\n

A partnership of S corporations lets you sidestep this limit, however. For example, say you want to run some venture as an S corporation but you have 200 shareholders. What you can do is set up a partnership with two partners\u2014each partner being an S corporation with 100 shareholders.<\/p>\n

In this case\u2014and the tax accounting will be just a little more work\u2014you can run your 200-shareholder business using all the benefits of an S corporation even though you\u2019re over the 100 shareholder limit.<\/p>\n

Note that this partnership of S corporations approach means you could have, theoretically, any number of owners benefiting from the S corporation tax accounting treatment. If you wanted to use the S corporation gambit for a business owned by, say, 500 shareholders, you could create a partnership of five<\/em> S corporations, each with 100 shareholders.<\/p>\n

A final note about the shareholder limit restriction: As practical matter, the 100 shareholders limit doesn\u2019t work quite the way you would at first think because a family of shareholders often, for purposes of the 100 shareholders limit, counts as a single shareholder.<\/p>\n

S Corporation Partnerships & Multiple Classes of Stock<\/h1>\n

Let me move onto using an S corporation partnership to work around another common restriction.<\/p>\n

S corporations require you to treat all the owners the same way in terms of their shares of the firm\u2019s operating profits, liquidation profits, and distributions of those profits.<\/p>\n

With an S corporation, if some shareholder owns 10% of the business, he or she gets allocated 10% of any profits. And he or she must get 10% of any distributions paid out to shareholders.<\/p>\n

This seems a subtle thing, but the one class of stock deal often greatly restricts owners from slicing and dicing profit allocations and distributing profits in the way they would like.<\/p>\n

You can\u2019t with an S corporation create a profit allocation formula that allocates profits or distributions on some basis other than ownership percentage.<\/p>\n

Just so you understand what I mean here, suppose you have a couple of entrepreneurs, Tom and Jeff. Tom does more of the actual work. But Jeff contributed the working capital and bought in the first customers.<\/p>\n

In a situation like this, you might like to create a profit sharing formula that worked like this:<\/p>\n