SECTION 1361 OF THE INTERNAL REVENUE CODE1 SETS FORTH THE REQUIREMENTS for an entity electing to be taxed under Subchapter S as an S corporation. S corporations continue to be a popular choice due to the potential savings on self-employment taxes resulting from the bifurcation of payments made to the owners into wages versus distributions, subject to certain requirements. There are many restrictions on the structure of an S corporation. The most commonly cited restriction relates to the prohibition of the following types of owners: a person whose ownership thereof would cause the company to have more than 100 shareholders; an individual who is not a United States citizen or resident; a trust (or the trustee thereof) which fails to satisfy the requirements of Sections 1361(c) (2)(A) or 1361(d) of the Code; or a corporation. MAGGARD V. COMMISSIONER GOVERNING PROVISIONS RULE THE DAY WHEN IT COMES TO THE ONE CLASS OF STOCK REQUIREMENT FOR S CORPORATIONS BY HANNAH FISCHER FREY & CARRIE SCHWAB, BAIRD HOLM LLP Another defining restriction of an S corporation is the limitations on classes of stock. Taxpayers and practitioners forming an S corporation, or adjusting the governing documents to the same, must take care to avoid violation of this limitation. With that said, taxpayers and practitioners may have more flexibility than they think. ONE CLASS OF STOCK REQUIREMENT Section 1361(b)(1)(D) defines an S corporation as a small business corporation that, among other characteristics, does not 16 Nebraska CPA
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