s corp investing in another s corp?

**crackers8199** · 02-04-2011 11:18 AM

ok, someone please help me with this scenario:

let's say i own a small LLC, that is taxed as a S corp. my business is pretty well established and actually making a profit. a few friends of mine are starting another business, also an LLC, also taxed as an S corp. they are struggling and could use some help. i'd like my business to help them out, perhaps with health insurance and also perhaps by providing some of my other business services to them - in exchange for a small percentage ownership of their small company.

it is my understanding that an s corp cannot own part of another s corp - unless it owns 100% of that s corp (unless i'm understanding that wrong)...my thought was this (and basically my question is): can we create a holding company, also an LLC taxed as an S corp, that owns both of the two smaller LLCs, and define profit sharing as something like this....

- owner A (me) gets 100% of the profits from company A (my profitable LLC) plus xxx percentage of the profits from company B (the smaller LLC)
- owner B (my friends) get 0% of the profits from company A (my profitable LLC) plus yyy percentage of profits from company B (their smaller LLC)

is that legal? is there a better way to do it? is there any way to do it? can anyone help me out? i know eventually i'm going to have to talk to a lawyer or two to find out my exact options, i'm just trying to ballpark this right now...

i want to keep the two companies operating as separate entities, if possible....

**crackers8199** · 02-10-2011 11:22 AM

of course i personally could invest in another s-corp...but that's not what i want to do. i want my small company, my LLC, to invest in the other s-corp. i don't want to have to take money as a distribution from my company and invest it personally...

the restriction i was referring to is the one that says owners of an s-corp must be individuals. an LLC is not an individual.

from bankrate.com, since it won't let me post a link...

S corp cannot:
A. Have more than 100 shareholders.
B. Have as a shareholder a person who is not an individual (except an estate or certain trusts).
C. Have a nonresident alien as a shareholder.
D. Have more than one class of stock.

The acquisition of shares of another S corporation by an S corporation will result in the prohibition under (b) above. Therefore, the answer to your question is no, an S corporation cannot own shares of another S corporation without voiding the acquired S corporation's Sub-S election.

An exception exists that allows an S corporation to own 100 percent of another S corporation. In this case, the subsidiary is ignored as a separate entity for income tax purposes and all its income and expenses are included as part of the parent company's tax return without distinction. So the real answer to your question is none or all.

**crackers8199** · 02-14-2011 02:17 PM

yes, but that's my point. i want both entities to continue being taxed as s-corps. it wouldn't be financially feasiblye to change the fledgling entity to a c-corp and have them open to double taxation...